What factors determine the success of the stock market?
Craig G. Rennie, assistant professor of finance in the Sam M. Walton College of Business, replies:
The stock market is successful when buyers are matched with sellers of stocks, and the stock market clears – in other words, all outstanding buy and sell orders are matched. Participants in the stock market succeed by earning profits. For example, New York Stock Exchange specialists who make markets in specific stocks seek profits from the difference between the bid-ask spread on their stocks, and from trading on their own accounts.
Companies employ stock markets to raise new equity, create a secondary market for existing equity, acquire other companies, divest assets, retire outstanding equity, reward stakeholders, and enhance visibility and reputation. Active stock market investors try to identify and take advantage of market inefficiencies, such as pricing anomalies, by using top-down global and domestic economic analysis, developing active or passive asset allocation strategies, and employing bottom-up security selection, frequently based on fundamental and/or technical analysis. Passive investors seek risk-adjusted rates of return by investing in funds that mimic those of market indexes. Arbitrageurs seek to identify and trade on mispricing between similar securities – for example, securities with similar cash flows – either within or between markets.
In short, successful stock markets are efficient, with high quality information flow including transparent corporate accounting disclosure, substantial liquidity, quick trade execution, low bid-ask spreads and other transaction costs, strong legal protection and enforcement particularly for small investors, and orderly stock market pricing. Taken together, these factors help determine the success of the stock market.