Overview of the Stock Market

(written by Willy Yanto Wijaya — October 2008)

Recently, stock market is becoming headline news in mass media due to the falling of index prices. As a matter of fact, Stock Market is one of the most unpredictable market and investment tools. The price fluctuation of this market depend on many factors; not only the economy sector, but also political, socio-dynamism aspects.

The lecture from Prof. Yoshi Murakawa covers exciting explanations about the dynamism of this stock market. If we observe the Dow Jones Index from 1998-2008, we can see that the index price of Dow Jones in 2008 is almost similar to 1998. Of course, the investors or shareholders who purchased the stocks ten years ago expect that the price will increase in this 10 year-period. It did, indeed, in the middle of 2006 until end of 2007. But who can predict that the stock prices will fall down so sharply in the middle of 2008?

Does this falling of stock prices imitate the Great Depression once happened in United States (1930-1935)? So then, can we expect that buying the stocks in this current deep-pit price condition will give us potential profits five years later? Nobody can guarantee about this matter. Playing stock market, in certain senses, is like gambling. Certainly, however, they are two different things. Stock market includes a bunch of factors that could be analyzed. These factors might be political, socio-cultural, security, as well as economy dynamism factors. It is indeed a complex system where various aspects are inter-related.

Then actually who decides the increase or decrease of the stock prices? Actually, it is mainly influenced by the market dynamism. To give brief illustrations, let’s say that someone is offering to you his stock (share of his company) with certain price. But since you know that his company is facing severe internal problems (actually this insider trading is against the law and not permitted), you refuse to buy. Many other potential buyers also know about this problem and decide not to buy. The seller, facing this reality, then decreases the stock prices, hoping that some buyers will be willing to take risk in buying the stocks despite the internal problems. On the other hand, some buyers analyzed that a company has good prospects to grow in the future, and they want to buy (high demand), this demand will certainly attract the tendency of the stock price to increase. This is just the simple illustration how the fluctuation of stock prices happens.

For the initial phase, offering your company stocks to shareholder means that you expect the investors/ shareholders to rely on you (credibility). You then implicitly promise them that the stock price/ value will certainly increase in the future. That’s why they want to invest their money in your company. They undoubtedly expect that this stock price will increase significantly, more profitable compared to other investment tools. Besides, expectation of dividend is also one factor being considered.

Then, can I play with this stock market? Yes, you can. Just call (for example in Japan) Nomura or other securities companies to order/ buy the stocks of certain company, make payment, and you did it. Many students in United States have even already started playing the stock markets even since their high school.

The stock price is also one of the factors that determine the Market Value of a company. One interesting example in Japan is the comparison between NEC (a big company) and Rhom (a small-size company based in Kyoto). Even though the revenue of NEC is more than ten times the revenue of Rhom, but since the stock price of Rhom is more than ten times the stock price of NEC, both company have almost equal Market Value.

CEO is the one who is responsible for keeping the stock price of a company. It is very interesting to notice that even a CEO of P&G had to retire in July 2000 due to sharp decrease of that company’s stock price in March 2000.

The trend of stock price, in its unpredictable nature, is always an interesting thing to be explored and analyzed.