Investors typically divide the markets where securities transactions take place into two types: primary and secondary. The difference:
–in a primary market transaction, the buyer/seller deals directly with the security issuer; in contrast,
–in a secondary market transaction, the buyer/seller deals with someone other than the issuer, who in today’s world is usually a professional intermediary.
primary markets have their problems
Primary markets are a tremendous hassle for investors like you and me. Imagine wanting to buy a share of MSFT and having to call up the company to do so. Once we’ve found the right person to talk to, there are issues to deal with, like how to take delivery of the share and how to safeguard it while we own it. What’s the right price?
Suppose you want to sell: if, say, MSFT doesn’t want to buy the share back, how do you find someone else? again, how do you agree on a price? where’s a record of recent transactions to check? if you’re the buyer, how do you know the seller is offering a genuine share or that he’s the legal owner? who notifies MSFT to send the dividend checks to a new address? what happens if you lose the ownership certificate?
In the early days, this wasn’t so crucial. Securities ownership was for the wealthy, the securities themselves were understood to be highly illiquid and transactions directly with the issuer were common. A single share of a South Sea Bubble venture, for example, would typically cost 10x the yearly wages of the average person. It’s really only in my lifetime that there has been the explosive expansion of secondary markets
(A side note: There are some securities, like Treasury bonds, that can be bought either directly from the government or from the primary dealers who are the Treasury’s main way of distributing government bonds to worldwide investors.)
the rise of secondary markets in the US
The cornucopia of secondary market investment tools that we have in the US today–discount brokers, zero commissions, fractional shares, no-load stock mutual funds, ETFs, index funds, options and other derivative trading, easy availability of margin loans, immediate online access to company financials through the SEC Edgar site—has mostly developed in the US and over the past thirty years.
How so and why the US? Important factors: superior government regulation of public companies and oversight of public markets, the immense expansion of corporate pension plans as investors, regulation of those plans through ERISA, the resulting rise of professional money management as a career, constant brokerage industry innovation, advances in computer technology, the internet, increasing wealth of Americans, high quality of domestic technology/biotech research firms wanting to list here. There’s also the stability of the political system, the clarity of the laws and an openness to the new and different
strongest in the world, by a lot
At $41 trillion, the US stock market represents 46% of the total world market capitalization. China, at 14.4%, is next, followed by Japan at 6% and London at 3.5%.
My experience is that Japan has more public disclosure for companies than the US and a much stronger financial press. But those exhaust its stock market strength. A strong cultural penchant for defending the status quo and a deep aversion to anything non-Japanese make the kabutocho a tough place to make money.
London has attempted to make itself a financial hub to rival New York. Its advantages are its openness to emerging markets’ issuers and the reliability of the British legal system. On the other hand, investor preference is for mature, dividend-paying firms, who are (to my mind, at least) the most vulnerable in a time of rapid technological change. I also think Brexit will continue to be a millstone around London’s neck as it tries to maintain its position as the premiere pan-European financial center.
For many years I’ve used Hong Kong as a way of gaining equity exposure to the booming Chinese economy. Wholesale market reform of that market triggered by its 50% collapse in late 1987 (a larger-scale version of the Pan Electric scandal in Singapore in 1985) has made it a relatively safe place to invest–meaning reliable financial reporting and selectivity in the mainland firms it chooses to list. Had Xi not decided to reclaim the SAR a quarter-century earlier than agreed, the Hong Kong Stock Exchange might have been able to establish itself as the leading tech financial center in the world, obtaining lucrative listings that now go to New York. Given the extreme political turmoil in Hong Kong, however, that’s not going to happen.
why this post?
It sets up two things I want to write about:
–why I think the commonly held view that there’s a roughly linear relationship between domestic GDP growth and local stock market performance is wrong, and
–why I think Trump’s attack on the nearly 100-year practice of allowing foreign companies access to Wall Street financing, an extension of his shoot-yourself-in-the-foot tariff wars, is a mistake.