Understanding Equity Markets
Trying To Stay Rational And Sensible During This Extraordinary Bull Market
Stock markets dropped 35% in February and March. Since then, despite economic slowdown and second wave fears, they’ve come roaring back and sit within a few percentage points of their all-time highs. This latest surge in equity prices has confounded professional investors and attracted massive interest and dollars from retail investors in way that hearkens back to previous asset price bubbles like Japan in the 1980s and the late 90s’ DotCom Bubble.
Regardless of your stock market outlook, it’s helpful to keep in mind why we have equity markets in the first place. Understanding their purpose and how they function will help us understand how the current exuberance will likely create massive and wide-reaching economic distortions — and ones that are not felt by just those who own financial assets.
Why Do Equity Markets Exist?
Stock markets (I use stock and equity interchangeably) are a way for entrepreneurs and owners of businesses to offload some business risk to savers. At a very basic level, you can think of capital markets as consisting of:
- Savers: These are everyday folks like you and me. We work to make money so that we can buy food, pay rent, etc…
