Engineer's Finance

Why are we investing in stock market? The answer is very simple. To trade and earn enormous profits on the investment.

The following is my thoughts that I have collected over the last couple of years.

From BSE India Site : Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 134 years of existence. What is now popularly known as BSE was established as “The Native Share & Stock Brokers’ Association” in 1875. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956.

The following are my thoughts that I have collected over the last couple of years. I have no idea about how stocks were traded in BSE before independence. I tried my luck to find that but it is nothing worth to report. I saw Guru, Mani Ratnam Movie loosely based on Dhirubhai Ambani’s life. In that movie I noticed that in stock market, the main character trades and how he does that is, he shouts at top of his voice. That is it. Assuming that this is how it was, and then we can conclude that initial days of Stock market were nothing short of shouting. So who can shout loudly? The people in the vegetable market or fish market can shout loudly. I assume that the investment firms wanted only such people to do their job that is, the traders were those people who can shout loudly.

The vegetable vendors selling vegetables and fruits were laborious & hardworking salesmen (of vegetables) and had some typical characteristics. They had a very loud voice, which is required for survival in a Market. If they cannot shout, they cannot attract customers to buy vegetables from their stalls. Hence, they fit the requirement quite well, as during those days, there was no electronic trading in the stock market. All they had was a designated floor area, where stock traders interacted with each other. Shameless and loud voice was the need of the hour and was required to attract traders.

Another criteria that these people fulfilled was that most of them had a well built physique with a good height – again good for attracting attention. Hence, the investment companies and brokerage houses picked up these tall, well built and loud voice humans to do trading for them and earn profit for the firm.

As technology evolved these traders were not efficient with the growing demands of the market needs. As the telephone came into picture, individual traders started placing the orders on phone and also the need to change this once efficient salesman had to be replaced with a bit sophisticated salesperson who was gentle and also knew how to talk to customers and get the orders. The need of the hour was to replace the vegetable vendors as it was not anymore required to shout and attract the customers. Hence this smart salesperson took over the job from the vendors.

Things went on well for few years, but use of computers and technology took things on a different path. As people had historical stock data, they started to get into research. Valuation methods like DCF, etc. started becoming common. So called researchers were finally making way to evaluate stocks. The educated salesmen were no longer worth the job. Hence, trading positions then went to mathematicians, physicists and economists – especially the students from math & economics. The salesmen returned to their sales jobs of door to door selling or working at showrooms.

Finally (and at present), the computer and internet have allowed everyone free access to data and valuation methods. Every smart Shashi sitting at home can now trade with his online account. Mathematicians, Physicists & economists with their limited knowledge about predicting stock prices and doing valuations were no longer required. As things became more and more efficient, MBA’s and PhD candidates with years of experience were hired to do trading and identify trends. They are the ones who are trading presently, and will continue to do so until the market identifies someone more efficient.