Nick McDonald

Getting started in financial markets

Nick McDonald: Do investors and traders help society?

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It's part and parcel of life as human beings that, whether we like it or not, many or even most of us get emotional about things involving money and investments.

Some are of course much more emotional and opinionated than others and there are naturally many different and conflicting opinions. It is important to formulate your own opinion on sensible and ethical investment decisions and stick to it.

This does not mean stubbornly ignoring factual evidence to the contrary, it simply means that the best traders and investors call their own shots and the opinion of someone else is not going to sway them. This myriad of opinions can be very difficult for the new investor or trader to navigate. For the newbie to the markets, it can become particularly distracting to hear people saying that they are not contributing to anything.

It's great that people have different opinions on money and where to keep it, in fact it's essential. If everyone was entrepreneurial and started businesses, there would be no employees. If we all saw the US dollar as a good investment, what would happen to the value of the NZ dollar if we all switched our cash and sold our NZD to buy USD? Our currency would collapse! If every investor was a buyer of a certain stock, who would they be buying from if there was no one who thought it was a good idea to sell at that exact same price?

There has to be both a buyer and a seller for any transaction to take place. For that to occur there must be two differing opinions, one person who thinks that a stock/security/currency is a buy, one who thinks it's a sell.

We need buyers and we need sellers. That's what efficient market places consist of and that's why in last week's column I mentioned that it was great that a lot of Kiwis got involved in the stock market for the very first time via Mighty River Power.

I don't have any significant opinion on whether the asset sales should be occurring or not, many other people hold those opinions and it can make some interesting and somewhat heated (emotional?) discussion I will leave it to them. To clarify, I did not buy MRP shares and I have no intention of buying them. The thing I like about the MRP listing however, is that more participants in the stock market in New Zealand creates more buying and selling, which in the markets is known as liquidity. This liquidity creates a more efficient market place and this is good for our society.

Of course that's all my opinion and I accept that other people will see what I see as fact, as an incorrect statement.

As an example, there are people of the opinion that having between 13,000 and 117,000 New Zealanders buying MRP stock for the first time is not a lot of new investors in our share market. I have seen reports of the correct number varying between those ranges so let's pick a number in the middle and call it approximately 65,000 people for argument's sake, as we don't seem to have a definitive answer on it.

I don't know how many New Zealanders held stocks previously, but I can take an educated guess that an extra 65,000 people exposed to the markets is a significant jump, and in my not so humble opinion, is a very good thing. That's sixty five thousand additional New Zealanders with an investment in our stock market, looking for ways to grow themselves and their portfolios. Many of those people will no doubt go on to make more investments and help Kiwi companies grow. Good on them!

But does this stock market investment contribute to our society?

Have you ever asked yourself why London, New York and Tokyo are considered to be the world's financial centres where people flock to work? Do people love the concrete jungles, the pollution and the high prices that much? Why are the jobs there? It's pretty simple, that's where the stock exchanges are.

New York is home to the two biggest stocks exchanges in the world, the New York Stock Exchange or NYSE and the NASDAQ. The third biggest stock exchange is in Tokyo and the fourth biggest is the London Stock Exchange or LSE. That is where the banks are, that's where the investors are, that's where the currency traders that help them transact are, that's where the people who manage the bankers' own money for them are, that's where the cash is and quite simply, that's where the jobs are.

Where there are jobs there are people. Take away those jobs and the same people arguing that traders and investors do not contribute to society will see this world in a very different light.

Ask anyone in London from 2008 through to today, how the economy goes when these financial companies stop recruiting and instead start laying their staff off. Many, many people are negatively affected by it. Far more than the few people on the side lines who feel aggrieved when businesses are doing well and creating jobs during the good times.

I am certainly not saying the financial world is perfect, there are bad eggs in the mix (it's the same anywhere) and we have all seen the headlines of such matters in the last 5 years involving Ponzi schemes, corrupt bankers, overpaid CEOs, unethical practices, company collapses and even outright fraud.

This is bad, plain and simple. Some things need to change, some things have changed but there is still more to be done. No industry will ever be perfect but there is plenty of room to improve My argument is that these occurrences do not make everyone who buys a stock to try and grow themselves a bad person. Every transaction is, in a small way, contributing to society. Jobs are created, money is made and money is spent that's what makes an economy go round!

There is no doubt whatsoever that many people will continue to say investing in the markets does not contribute. But remember, this is a good thing,! We don't want everyone investing in the markets as that would be inefficient and it would not work. In a country like New Zealand however, where trading stocks is a relatively new endeavour for most people, it's a good thing in my opinion to get more people involved in the markets.

Those that disagree are welcome to comment from the side lines and tell us we are wrong. Personally, if I can help anywhere near 65,000 more people around the world get involved in the markets, I will feel like I have indeed helped make a contribution to A LOT of people.

- NZ Herald

Nick McDonald heads up www.tradewithprecision.com a global company teaching everyday people how to become a trader in the world's financial markets.

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