It’s Illogical to Fear a Fair Stock Stock Market

I’ve encountered my fair share of people who refuse to invest in the stock market because they see it as a dangerous place where a cabal of “insiders” and “big boys” are in control. Thing is, this may be far from the truth.

There may in fact, be reason to think that the stock market is one of the fairest markets around. You don’t have to take just my word for it though – billionaire investor George Soros is of the same view too.

According to Soros, who’s an active philanthropist now, the stock market comes close to being the best example of a market with perfect competition. The following are some traits which Soros thinks the stock market has (which I agree fully with):

  1. A central marketplace
  2. Homogeneous products
  3. Low transaction costs
  4. Instant communication
  5. Low barrier of entry for participants to join
  6. Large enough participants in the market to ensure that no one fully controls the market
  7. Readily available information for everyone
  8. Rules and regulations in place to control insider trading and other forms of abuse in the market

What’s interesting about the traits mentioned above is that many other markets do not necessarily have the same characteristics. In fact, even the market for shampoo may not be as fair as the stock market.

For example, shampoo does not have a centralised marketplace – we can buy from many different retailers or distributors. The transactional cost of shampoo is also high for end consumers, in the sense that the price we pay for the product is way above the actual cost of production.

It is also not easy to know about every type of shampoo there is in the market as there is no centralised database. Due to the lack of information, it is also hard to regulate manufacturers and retailers when they misrepresent the product or overcharge customers.

With these in mind, there’s an argument to be made that it is easier for us to be shortchanged when buying a bottle of shampoo than it is to invest in the stock market. Yet, there are many who feel very comfortable buying shampoo over their lifetimes while feeling uneasy about stocks.

Foolish Summary

The stock market can be a dangerous place for investors who are uninformed about how it really works.

But, for those who are willing to learn about investing, you will soon realize that the stock market can be fair. Everyone has a level playing field. It is easy to get started, regardless of how much wealth you have. Everyone can access the same type of public information, and everyone has a chance to make it to the top, regardless of where you begin.

That wraps it up for this article. For more (free!) investing tips and tricks and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.