A: Discouraged stock investors, worn down by ten years of subpar returns, have their pitchforks ready.
Investors who counted on the stock market to generate decent returns have been solely disappointed as stocks have done essentially nothing the past ten years. And seeing their 401(k) plans and brokerage statements stuck in the mud, these investors are looking for a someone to blame.
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STORY: Market manipulation due to computerization of the markets
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COLUMN: Is diversification another failed market theory?
You suggest you have found evidence the stock market is in fact fixed by the insiders. The fact that millions of shares of a stock trade hands in a big company like Cisco (symbol: CSCO), and the price hardly budges, is surely a sign of market manipulation, right?
Actually, no. In fact, what you’ve observed with Cisco happens every day with thousands of stocks. It’s how the system is designed. Stock markets work best when there are many buyers and sellers constantly buying and selling stock with each other. It’s called liquidity. Liquidity, in its simplest form, is a way to describe when a market is actively working.
Liquid markets benefit shareholders. Let’s say you want to sell your shares of Cisco right now. There will be hundreds of investors lined up, ready to buy your shares. The liquidity of the market allows you to raise cash quickly, which makes the stock market an attractive place for investors to put money.
Imagine, on the other hand, if the market was not liquid. Imagine putting your shares of Cisco up for sale and only a few buyers step forward. Making things worse, these buyers realize they’re the only ones bidding, so they offer you a low-ball price on your shares. You could be forced to either hold on to the shares, against your wish, or sell at a fire sale price.
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Liquidity is the grease that keeps the stock market moving. Clearly, there’s some controversy over how much of the buying and selling in the market is coming from true buyers and sellers, versus computer programs. But still, liquidity in itself isn’t a problem, but a benefit to investors.
The very thing you noticed, the stock hardly budging despite all the trading, is kind of proof the system works. All that trading activity is creating a solid and deep market, with large pools of buyers and sellers at the market price. The fact the price barely moved indicates it’s a fair and accurate price given what information is currently in the minds of investors.
Investors should usually target stocks that have lots of trading volume because they can get a better price when they buy or sell.
Lots of trading activity typically keeps the difference between what buyers are willing to pay and what sellers are willing to accept very close. That means when you buy or sell an investment, you get to keep more of the money yourself rather than see it get skimmed off by speculators.
That’s not to say there aren’t any games going on in the market. It’s just that liquidity isn’t the problem, per se.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz