>I have one item that has occupied my thoughts lately: what are the premises and covenants that stock market investing is based on?
>I would like us to make a list of tacit assumptions that underlie our participation in the market.
Gottfried,
One of the most perplexing assumptions about the stock market (IMHO) is that of a so-called "perfect market", or "perfect competition" within markets.
According to Barron's Dictionary of Finance and Investment Terms, perfect competition is a "market condition whrerein no buyer or seller has the power to alter the market price of a good or service. Characteristics of a perfectly competitive market are large number of buyers and sellers, a homogenous (similar) good or service, an equal awareness of prices and volume, an absence of discrimination in buying and selling, total mobility of productive resources, and complete freedom of entry. Perfect competition exists only as a theoretical idea. Also called pure competition".
Theoretical, yes. But to what extent is the stock market a perfect market as described above? I really have no idea. However, I think this is one important assumption. It is possible that individual stocks vary in their nearness to perfect market conditions.
In other words, some are more perfect than others.
Be that as it may, it seems to me one has to have some set of operating assumptions about the market. On a scale of 0 to 10, if 0 is a totally manipulated market, and 10 is a totally perfect market, then what number would you give the NASDAQ exchange, the NYSE exchange, the AMEX exchange and so forth?
My personal inclination is to give the NYSE a 9, the AMEX a 9, and the NASDAQ a 7. But I have no data or facts to support my gut-level impressions. What do you think?
Ice |
