*Disclaimer – Update: The views reflected below tackle the notion of investing 100 LE in the secondary stock market, I exempt from that view purchasing T-bills in the primary market or any primary market purchases for that matter.
I hate to make a tired point. I had laid this investing in the stock market issue to rest, but having the prime minister and the minister of finance endorse this absurd idea on TV is just too much for my poor nerves.
I, the nobody that I am, stand firm by the belief that it is a bad idea, or at best it is being inaccurately advertised. Investing money in the stock market will NOT save the Egyptian economy. Actually, given the size of the value of the market capitalisation of the Egyptian stock market, nor will it save the stock market. The only silver lining to this idea is the potential gains you stand to make as an investor if you buy when the stock prices dive when the market finally opens. A couple of months down the line you could sell these stocks at higher prices and make a killing.
Back to saving the economy. You want to save the economy? Lovely sentiment. Save it by investing in new business ventures, in SMEs, donate money to micro-finance NGOs, donate money to the Food Bank and other charities, consume Egyptian products. THIS helps save the Egyptian economy. The REAL economy.
Now, the stock market has historically been called “the mirror of the economy”. Allegedly the performance of the market reflects the health of the economy itself. A friend, Zizo, once said it beautifully:
If your face looks messed up in the mirror, do you fix the mirror? or do you fix your face?
The stock market, originally, was invented to enable corporates to seek funding from the public. Companies would then issue stocks through an Initial Public Offering (IPO) giving purchasers of that stock ownership rights in the company by virtue of their stock (becoming shareholders) and the corporate now has cash to invest in expansionary activities. Whenever this is the case investing in an IPO helps boost the economy and injects cash into the companies.
Yet once these stocks are issued they are then traded on the secondary market (the one you hear about people trading on all the time). In this market you buy stocks from existing shareholders, the money you spend goes to them and you become the new holder of the stock. By buying stocks on the Egyptian stock exchange you are not growing the pool of investments in the country. Instead you are just passing around the paper that says you own part of a particular company. The company itself doesn’t get any of the money.
To give you a crude example, this solution of investing 100 LE in the stock market will have as much impact on the stock market as you buying your neighbour’s second hand Beamer would have on the BMW company (hint, the answer is no impact whatsoever).
The scary part is not that they are endorsing a futile exercise, the scary part is the opportunity cost of this investment. The money that will be flushed down the drain could have gone to better use at other venues. The stock market is a virtual economy, the money that will be spent there will be lost, leaked out of the system as foreign investors sell off their portfolios and take their money elsewhere. This money should instead be directed towards the real economy, real business generation, real production, real employment and real GDP growth.
So the next time someone tells you to invest 100 LE in the stock market, do me a favour, think twice. If you still decide to go through with it, make sure you acknowledge your real motives (looking for profit rather than looking to save the economy).