A popular video game is a story-based activity where players build an imaginary life on their own island. One aspect of the game allows players to buy turnips in what’s called a “stalk market” which can then be sold throughout the week at varying and random prices. The selling prices will either result in gains or losses for the players depending on when they sell. It’s a popular feature, with online chat rooms dedicated to finding and sharing the best times to sell the turnips.
The real stock market has little to do with the game’s version and thus the mostly younger players are not being taught correctly about investing. Their game more closely resembles a casino, or a game of chance. If people are to become successful investors using the real stock market, they need to understand why it was created, and how it works. Though many investors use the stock market like a casino, to gamble on random events, this is not its true purpose nor its value to society.
The stock markets were created to provide a forum for the allocation of capital (money) to those companies who will use it most efficiently. Imagine a baseball park with two food vendors. If one company provides better food with amazing service and at a reasonable price, it will draw in customers and be more profitable. This business will then attract more investing dollars that can be used for expansion. The weaker business will need to improve if they are to stay in business. In this simple example of the free flow of capital, everyone benefits. The fans get better and less expensive food. The valuable employees can command better wages. And the investors are rewarded with growing profits.
There are always some areas of the stock market that do not operate efficiently. Government regulatory intervention, manipulation by strong players and even the more recent trend of social media groups banding together to move stocks without regard for specific company value can push capital around in a less efficient manner. These behaviors create false and dangerous areas of the markets than cannot be sustained, but often tempt individuals to invest in a high-risk manner. That type of “game of chance” investing is better suited to a weekend in Vegas or, better yet, a video game that uses pretend money.
If your goal is to invest your savings in the hopes of building long term wealth, I encourage you to remember why investment markets exist and use them accordingly. Look for businesses that you believe have a likelihood of being able to use your investment dollars efficiently by building an even bigger and better company. Your future, and our nations’ economic future, depend on a free flow of capital to where it can be most efficiently used. As small investors we can each be a part of, and look for benefit from, that wonderful process.