As I often open my stock market lectures, "The purpose of the Market is to redistribute the wealth from the many to the few. The object of the game is to be among the few." Of course there are winning stock market speculation strategies and the rest of my lecture explores some of these tactics. However, the focus on a winning speculation strategy ignores two basic questions.

What Should the Purpose of the Stock Market Really Be?

Aside from some of the winners in the Stock Market game, I doubt that most people believe that the goal of the Stock Market should be to fleece the public. I suspect that the best purpose for the Stock Market would be to create jobs and strengthen the National economy with profits flowing to investors. To move the market in this direction, speculators would have to become investors, insiders would have to withhold their shares from the market, market professionals couldn't sell short, compliance costs would have to be reasonable and so on.

The Venture Capital Profits ebook explores operating a company with the idea of "everyone can win the Stock Game," if the goal is to create jobs and a viable long-term business. The ebook sells, but there hasn't been a rush of companies seeking to implement its strategy.

How Does the Stock Market Really Work?

It operates on perception and short-term greed. Anyone who can manipulate the perception is a potential winner in the stock market game. Some variant of this game has been played tens of thousands of times in Canada and the United States.

The promoters put out the word that XYZ company's shares are about to move on up. (The supposed reasons for the move may or may not have anything to do with reality.) There is public speculative buying of the stock and the share price starts to move up. There's more hype that results in more public buying of the stock. The public buyers of the stock believe that the share price will continue on up and few sell.

The Killing

At some point the insiders and the market professionals start to sell into the public buying of the stock. The hype continues and the insiders and market professional selling expands. At some point the hype ends and the market professionals sell short the stock. The primary group selling short are the brokers and market pros. There are some promoters who will sell short, IF they run out of access to stock or if they want to fool the regulators. In any case, the share price falls. Less than 2% of the public speculators make money because they hold their stock too long.

On average, this hype game can be repeated four times with a small cap stock. The limiting factor is that the cost of each stock promotion grows as the float (shares held by the public) increases. Eventually, the hype doesn't move the share price because there is too much stock in the float. After the last hype, the company usually stops doing its regulatory filings and the share price sinks into oblivion.

Could Everyone Win?

This question isn't often asked about the Stock Market. We learn from the games we play and the sports that we participate in that there must be winners and losers. However, creating a horde of losers doesn't benefit anyone. Redistribution of wealth has no positive purpose for Society.

Another of my maxims is that stock is money. Insiders can convert their shares to dollars in the Stock Market. Or, the public company can use their shares to acquire cash-producing assets and build the public company's bottomline. If CISCO Systems could do it, any company can do it. It's possible to develop a cadre of public shareholders, without downside risk, who will hold the company's shares for years. You can stop short selling by creating a cash market for the company's shares. You can allow everyone to sell their shares at the highest possible price by arranging a friendly takeover once the company's assets justify merger interest.

Hard Work

Should Everyone Win? I'd reply "yes." However getting an everyone wins strategy to become fact is hard work. Merely convincing the public, the insiders and the market professionals that there is far more profit in an everyone wins strategy, than in the current Keystone Cops Market Strategy, has proven to be very difficult.
About the Author

He has been the Managing Director of Beowulf Investments [home.earthlink.net/~beowulfinvestments/">home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/">home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] You can email Mr. Cate at: Beowulfinvestments@Earthlink.net