It most certainly does not have to be regulated, at all, and would still function. But maybe the ride would be to bumpy for his delicate tastes?
Sure. If people are allowed freedom, then they make stupid mistakes, like buying overpriced stock.
Then, when there is a macroeconomic problem, that cranks up the fear out there, and turns buyers into sellers, well then that leads to a panic as most everyone tries to sell.
So we can't allow that pesky freedom, because people might do stupid things, security is so much nicer than being free. It's a good thing we have people in the government regulating, because they are incapable of making mistakes, unlike other people.
Seriously, one advantage of regulation is the attempted prevention of straight forward fraud. Fictitious financial statements, ponzi schemes, ect. Attempted because it doesn't and can't work, anymore than laws against drug dealing prevent drug abuse in the US. Madoff, Petters, Stanford ect all ran their ponzi schemes (associated with the stock market) while making every regulatory filing required.
Regulation covers many things. One aspect is the financial strength of institutions. Banks are forced by regulation to have so much capital headroom in order to protect borrowers/lenders. If the regulation is lightened or taken away then the financial institutions will go mad-as happenede in the 2008 crisis.
The rules, regulations, and traditions that purports to level the field to make it fair and efficient for all.
Lets say we removed the rules for market makers, inside trading, margins, registration, sophisticated investors among a few.
Market Makers - make the market and are obligated to take both sides of the trade, they are the house. If a market maker decides not to buy shares from the public in a falling market he/she doesn't take a loss, of course there will be a loss of confidence in the stock then no one will buy it. The market maker will then keep all his profits and abandon that stock. This will lead to market instability by losing the liquidity the market needs, companies will also lose confidence in the market as a way to raise capital and if they do enter the market will have to back the market market in order to promote shares of the company. As it is now there are a myriad ways for Market Makers to take advantage of investors by triggering stops, forcing shorts to buy, forcing longs to sell to make their profits. Remove any regulations and there will be a few market makers who will soon take advantage of the market and all confidence will be lost.
Inside Trading - Only those insiders will have the information to take advantage of market price, they could sell prior to bad news, or they could buy prior to good news, they can rock the market prior to any news such as flooding the market with shorts so price will drop thereby having the opportunity to buy up all the stock at a discount prior to positive news. The opposite can happen as well, sell a lot of longs to flood the market prior to a negative report, close out the trade once prices dropped.
Margins - brokerage and other institutions can change margin calls to profit, they can encourage reckless investments or gambling to increase their profits, then can change the margin to trigger a sale thus encouraging additional profits. If they are a market maker or have inside info they can play both sides and multiply their profits. If we take it a bit further we can launder money legally, move money around to hide it's source, do a quick shell game and make money disappear or appear temporarily to defraud investors, companies, institutions, and the government.
Registration - Brokers, advisors, sales, institutions and others that are now regulated and licensed would not have to be, we'd have all kinds of under-capitalized institutions, scrupulous sellers, under-capitalized companies being propped for IPOs that would fail in days after offering. There would be no standard code of ethics or rules for anyone to follow it would be a wild and wooly economic casino with the buyer and seller beware. Luck and insiders would be the ones benefiting. There would be no confidence in the market or the institutions.
Sophisticated Investors - all strategies, products, investments would be open to all regardless of income, wealth, standing, education, experience, and other criteria. You could have partnerships such as gas, oil, leasing, real estate and others open to all, and have the investors take full responsibility of all profit and loss including any lawsuits, whereas now the investor is usually just in a limited partnership and limited to loss of just their original investment. Same for stocks. Institutions without regulation could structure an investment into tiers where the insiders take all the profit and the other tiers take all the loss or have to wait years before they recoup their original investments let alone any profits.
Without regulation you could have legal ponzi schemes. Fraud would be rampant, actually without regulation there would be no such thing as fraud it would be buyer beware. No backing of any capital investments from small or large investors. The economy would take a massive hit because of no confidence or at the least the economy would grow very slowly as to be insignificant.
Regulation is a way to create an efficient and fair economic system for the greater good. btw these are just a few examples of regulation leveling the playing field and promoting as fair and efficient market to benefit the economy.
Regulation leads to reduce fraud, inside trading, and cheating, in opposite, deregulation increase fraud, inside trading and cheating. So, investors loose confident and start to widthraw their money, which eventually leads to stock market crash.
yes
Ok so I have to right an essay with the prompt being why the stock market must be regulated and why deregulation could lead to a stock market crash. Can someone explain how deregulation could lead to a stock market crash
