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Stock Market Expertise

by Professor Paul Barnes
MA MSc PhD CFE ACCA
Professor of Finance & Fraud Risk Management
(More about Professor Barnes)

A stock exchange is an organised marketplace for the buying and selling of securities, the most popular forms being equities. In the UK, this is the London Stock Exchange. Equities are sometimes referred to as ‘ordinary’ or ‘common’ shares or stock. There is no difference between a stock and a share, nor is there a difference between ‘ordinary shares’ or ‘common stock’. These are also sometimes referred to as ‘securities’, a wider term to include stocks and shares, equity ‘derivatives’ (that is options to buy or sell equities) and other products having a similar effect.

The principal objective of a stock exchange (especially one in a developed country) is to provide a free and fair market in all the securities traded on the exchange. Buyers and sellers are able to trade in the confidence that market prices fully and correctly reflect information and that this is fully and quickly released to the market. If this occurs, the market is described as ‘efficient’.

If this does not occur, i.e. individuals and organisations do not perceive it as fair (e.g. they believe there are many investors trading using inside information), they will be discouraged from investing. The nation and the companies that provide its economic wealth will suffer from the denial of this investment in their future plans that they would have otherwise received.

For this reason the markets are regulated (in the case of the London Stock Exchange, primarily by the Financial Services Authority). Strict regulations govern:

  • how information is released to the market
  • what financial information should be provided and
  • how economic transactions should be measured (by auditors and the accountancy profession).

There are also criminal and civil laws prohibiting ‘market abuse’. Market abuse is a general term to describe actions by dealers and investors to unfairly take advantage of other investors. It includes not only insider dealing (buying or selling on inside information likely to affect a share price before it is released to the market), but various forms of behaviour aimed at misleading the market. The simplest example is providing false information about a company’s performance or giving a misleading impression of the market and interest in its shares.

The ‘Credit Crunch’

The ‘Credit Crunch’ brought about many rapid, and in some cases enormous, changes in the perception of the financial strength and performance of individual companies whose shares are listed on the London Stock Exchange (‘listed companies’) and, therefore, the stock market. The volatility of stock markets and their collapse after a prolonged boom are well known to economic historians, if not to market participants. One consequence is that, whilst the ‘real economy’ is in recession and the stock market has fallen (i.e. share prices generally have fallen), there will be many new opportunities for profit in the markets (for instance ‘short selling’), both legitimate and otherwise.

It is expected that the Credit Crunch will lead to many legal actions by those who have lost money in what appeared sound investments. There will also be actions against those who have profited from falling prices and against those organisations with ‘deep pockets’.

Financial experts

There is an important distinction between ‘financial advisers’ and ‘financial experts’. The former may often be little more than salesmen (independent or tied) of various financial products dependent on commission for a living. A ‘financial expert’ should not only be independent but have a sufficiently wide understanding of the workings of the stock market as it relates to other markets and the ‘real economy’.

Most ‘financial experts’ are likely to be academics. They are likely to understand the interactions of the various financial markets and the economy. On the other hand, some may not have sufficient intimate experience and understanding of the day to day working, conventions and practices of the markets that a practitioner (or ex-practitioner) will possess. However, a practitioner’s expertise may be specialised and limited to a particular sector of the market.

Qualifications

There are no qualifications to act as a guide. For instance, it may be assumed that experts who are chartered or certified accountants will be able to offer a certain level of expertise in accounting. But it should not be inferred that they have anything other than a basic understanding of finance and the workings of the stock market.

Questions to ask the expert
  • Is there a fair market in the securities?
  • Has the market been misled (or has there been an attempt to mislead the market) about the value or market in the securities?
  • Has a purchase/sale of securities been made on the basis of inside information?
  • Has an investor been sold securities over the telephone (a ‘boiler room’ operation) and now feels to have been misled?
  • Should a company have released ‘price-sensitive’ information to the market? Did it release the information properly and correctly?
by Professor Paul Barnes
MA MSc PhD CFE ACCA
Professor of Finance & Fraud Risk Management
(More about Professor Barnes)

 

 
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