Selecting a Stock Exchange - Finance

Selecting a Stock ExchangeByWilliam Cate

Every stock exchange is a doorway to investors' money. The primary purpose of any stock exchange is to redistribute investors' money. The purpose of Government regulation of stock exchanges is to give the false impression that the investors' money is redistributed fairly. It isn't.

If redistribution of investors' money is the Prime Directive for every stock exchange, recruiting investors' money is the focus of the stock exchange's activities. Most stock exchanges face a list of obstacles in attracting investors to buy that stock exchange's traded shares.

Currency ProblemsMost counties have currency exchange restrictions. The local currency cannot be converted into other currencies without the permission of the government. This practice allows the government to maintain a better exchange rate with major currencies. It's harmful to the growth of local business. It makes the stock exchange's efforts to find investor money difficult. What benefit is there for foreign investors in making a profit in a currency that you can't use? If a country has a foreign exchange exemption for stock exchange investors, that exemption lasts as long as the government sees it as beneficial. Governments have a long history of stealing foreign investment and there is no reason to believe that given motivation, governments won't take investors' money from their local stock exchanges. The potential stock exchange profits must justify the added risk of currency control for the investors in that stock exchange.

Almost all governments have a currency inflation problem. Governments tend to lie about their annual inflation rate. For instance, in the United States, the Government shows the Consumer Price Index (CPI) for 2005 to be about 4%. The CPI is the U.S. Governments statement of the U.S. inflation rate. However, the American business community tends to double the CPI to estimate the real U.S. inflation rate. If investors are considering investing in shares of a stock exchange, they must know the real inflation rate, if you are to be paid in that country's currency. Stock exchanges pay in their country's currency and investors' potential profits have to be adjusted by that country's real inflation rate and then factored by the inflation rate in the country in which they reside. Doing this often makes high stock exchange profits to be a negative return on investment once potential investors adjust for the inflation rate.

Information ProblemsIf investors cannot get daily quotes on a company's shares, they will not risk their money. While almost all stock exchanges have websites, it's far easier for most investors to get Internet stock quotes on American stocks than it is on shares traded outside of the United States. Access to share information is directly related to the amount of money available to any stock exchange. The Internet information bias strongly favors American public companies since it makes it easier to buy and sell U.S. shares. The result is world stock exchanges are less liquid than they would be if all Internet stock quote services included the companies trading on their stock exchanges.

Credibility ProblemsGovernments create the illusion of investor protection in their stock market. Some governments do a better job than other governments. The U.S. Securities and Exchange Commission has proven to be one of the most effective illusion makers among national regulatory agencies. Investors false believe that the American markets are a level playing field and they are risking their money on an honest gamble. For this reason, more money flows through American stock exchanges than most stock exchanges in the world.

Population and Affluence.The size of the country's population and the average wealth of its citizens play an important part in the money available to that country's stock exchanges. If you want to list your company on a public stock exchange, pick a country with a relatively large and wealthy population.

Operating private companies seeking to be public have a relatively short list of the foremost countries to list their shares. The best two options are either the United States or Great Britain. Before a company lists on its national stock exchange, it should compare the costs and benefits of listing in London or the States. The American market offers non-Domestic companies numerous advantages for listing on any U.S. Stock Exchange. For companies trading elsewhere, listing their shares in the States is a cost effective investor relation's tool that they should carefully evaluate. There are potential tax advantages to listing in American or England that should be explored with the company's tax advisors.

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