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The Stock Exchanges and the Banks

stock exchanges and banks

The Stock Exchanges and the Banks

Why one should know

Modern man can ill afford to be ignorant of the fundamentals of the banks and stock exchanges. These two are ubiquitous and play different types of rolls in the lives of peoples, whether people like it or not. When the public profiles of banks are relatively calm like the Pacific Ocean, the stock exchanges are like the Atlantic Ocean, turbulent and volatile and there is the Bermudas Triangle where ships and even giant aircrafts flying over it disappearing without a trace. And even the calm at the surface of the banking ocean is deceptive. There are the undercurrents and El Ninos which can have great impact on the economic climates of nations. People’s lives are closely connected with these two modern institutions and these institutions do not spare you even if you are least inclined to involve yourself in their activities. But it has become nearly impossible for the layman to understand the mechanics of them because of the jargon peculiar to the stock brokers and bank men.

Banks and Stock Exchanges to be understood together

Banks and stock exchanges are like cousins. Despite the differences in their activities, they have two very important things in common. These are the two major institutions in which people invest their savings, particularly when they need to encash their investment at a moment’s notice. The other common characteristic of these two cousins is the dependence of the chieftains of industrial production on them for raising capital to their enterprises. Manufacturing companies float their stocks/shares in the stock exchange. The retail investor buys these shares and the company gets its capital. Banks lend money to the industrialists.

The Stock Exchange – speculators spoil the game

Originally the entrepreneur went to the stock exchange for raising capital. The companies give dividends to the share holders. Those shares that earn more dividends are available in the market with a premium. For example a $10 share may be sold in the market for $ 100 and even $1000! Here enters the speculators. They purchase and trade in en masse when a particular field of industry has very bright prospects and make the share prices soar high. When there is a purchasing spree in the market we tell that the ‘bull’ is dominating it. When there is a selling spree, it is a ‘bear’s’ market. When there is a selling spree, the share prices fall and what we call a ‘crash’ takes place. Because of these speculators, stock market is no more a safe place for the average citizen to invest his money and earn some dividends. One’s lifetime savings can be wiped out in a day.

The omnipotence of banks

Banks started their work in the economy as middlemen in making payments. Fearing for the safety of their hard earned money, people started avoiding the stock market and banks became their choice. The banks collect the financial resources of the entire society and place it at the disposal of the industrialists and business men. The deposits of the investors are given as loans for productive and business activities. From the interest earned from the advances (lending), the depositors are given some interest. The banks act as book keepers for the industrial and business community. In the process the entire financial resources of the society come under the banks. The banks merge to centralize the financial resources of the society and two or three bank become omnipotent. The entire economic activities of the society come under the banks.

The cousins co exist

But what happened to the stock exchange? Has it become a poor cousin? Not at all. The stock exchange has grown and has become much more complicated and powerful along with its younger cousin, the banking industry. What is more, banks themselves have started involving themselves in the stock market by floating various schemes like ‘mutual funds’ etc., The banks have started floating shares in the stock market. To increase the value of their shares they have to ensure maximum returns for their investments. That makes them enter the stock market. So the stock exchange thrives. But the speculators, as usual, spoil the game. We need good control mechanisms to regulate the banking and stock markets. Otherwise, the average citizen is never safe there. Even when there are control mechanisms, there is no 100 per cent safety and the element of risk is always there. The venture should not become an adventure.

RAVI
Published: 2006-05-29
Author: Narayanasamy Srinivasan

About the author or the publisher
I am a 50 year old man. I completed my post graduate course in English language and literature in the year 1977. I am also a qualified teacher. My fields of interest are classical literature in different languages, current affairs of the world and human psychology.

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