News Column

Is Wall Street Rigged?

March 5, 2013

Investors have plenty of reasons to distrust Wall Street, and some figure it's best to just avoid stocks rather than getting fooled again.

It's understandable that investors are so down on stocks. It's been a rough time for Wall Street's credibility since 2000. There have been massive accounting frauds, several market crashes, including the flash crash in May 2010, not to mention allegations of crooked analyst recommendations.

These factors, magnified by the rise of split-second computerized trading, have led some investors to throw up their hands in disgust.

Investors have some legitimate gripes with Wall Street. But they also need to understand there's a big difference between how stocks behave in the short run and what happens over the long term.

In the short term, stocks trade up and down based on fleeting factors powered by speculation and imbalances between the supply of shares and the demand for them. Speculation can ebb and flow based on the short-term feelings of investors and their sentiment. But over the long term, the effects of speculative moves get washed out. Things such as the company's size and valuation are overwhelmingly more important determinants of how a stock will do, numerous studies have shown.

Investors need to remember that when they buy stock, they're buying a claim to a company's future earnings and cash flow. Investors may disagree in the short term how much a stock is worth and that leads to short-term ups and downs. But over time, the driving factors that set the value of a company are its fundamentals.

Source: Copyright USA TODAY 2013

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