Zaks Investment Advisory Service

Exchanges. Their size, volume of trade. Liquidity.

Good morning. This is Sergey Zaks. Our programs are about investments, and so we will start with a discussion of some very basic things: where we invest our money, and why we do so at all. At first glance, this question may seem rather absurd – of course, we invest money in order to earn a profit. But one may invest money in all sorts of things: gold, real estate, art. And it is far from evident that these investments will necessarily bring us any returns. In one of our future programs, we will talk about real estate and compare its growth in price to the rate of inflation. The results, as you shall see, are far from obvious. In the United States, the most common types of investments are made in private companies, whose shares are traded on the stock exchanges of the United States. Investors do it out of the simple assumption that these enterprises will be making a profit, some of which will make its way to stockholders, who, by virtue of them owing shares of the companies are their partial owners. In some countries, by the way, these sorts of investments are almost impossible to make – for example, in countries where all of the enterprises belong to the government (like, say, Cuba). In many other countries, where the market is small, risky or manipulated by the government or “insiders,” i.e. people who trade on “inside” information inaccessible to the public at large, people also invests little in securities (for example, such is the case with Russia). By the way, why do you think Russia has such high real estate prices? In part, because it has no real stock market. If there was one, then a part of the money that Russians now invest in real estate would go into shares of private companies. As a result, prices on homes and apartments would decline, and the prices of stocks – rise.

But the United States not only has a stock market, it also has the largest one in the world. The United States has several stock exchanges. The largest one is the New York Stock Exchange. Every day, between 1.5 and two billion shares are bought and sold on the exchange, and the total volume of daily trade is about 70 billion dollars. The total value of stocks on the exchange (something called “capitalization”) stands at about 12 trillion dollars. The volume of trade on NASDAQ, the second-largest US exchange, is about the same, but its capitalization is smaller, at about 3.5 trillion dollars. On the whole, the value of US stocks is more than 18 trillion dollars. As I have already mentioned, about half of the adult US population owns stocks: either directly, or through investment or pension funds. This percentage is higher than anywhere else in the world.

For comparison, the daily volume of trade on Russia’s two largest exchanges, the RTS and MICEX, is about 30 million dollars (compared to 70 billion in New York), while the capitalization of the Russian market is about $680 billion, $250 billion of which belongs to just one company – Gazprom. There are about 250 trades made daily on the RTS – a miniscule amount by US standards.

You might say: but it is a joke to compare the US market to Russia’s. And it really is. Let us compare it to more famous ones: the two largest markets in the world (after the US ones) are those in Tokyo (with a capitalization of about 3.5 trillion dollars) and London; its capitalization is slightly less than three trillion dollars. And the German market (in Frankfurt) is about half the size of London’s. In other words, all rolled into one, they would still be smaller than a single New York exchange.

These figures would not be so interesting in and of themselves had they not also determined two things: the possibility that markets could be manipulated, and so-called “liquidity.” It is practically impossible to manipulate the market at such enormous trading volumes. And it is impossible not only for individual investors, but also for large investment companies and, in case of the currency market, even for the central banks (although they very often try). And in this respect, the US market is fundamentally different from that of many other countries. The enormous volume of trade also creates market liquidity. This means that you will be able to buy or sell your shares whenever you need to do so.

The size of the market is not the only reason why there is practically no manipulation on the exchanges. Investors’ interests are also being protected by the SEC, the Securities and Exchange Commission. It has a fairly pompous name, but its job is an incredibly important one. It track things to make sure there is no “insider trading” on the market, and also watches how brokers, dealers and other market participants operate. The absence of similar organizations in developing nations, or their inefficiency there, makes their markets more risky. But we will talk about that in far greater detail in one of our future programs.

In addition to stocks, US investors also purchase all sorts of bonds: federal, municipal and corporate. That market is enormous as well: for example, federal obligations alone are worth about 11 trillion dollars. We will devote a separate program to bonds.

But with this, we will have to draw today’s program to a close. Once again, this was Sergey Zaks. Thank you for your attention and until next time.