When the stock market turns against you

The concept of wealth creation is fairly new to Maldives. Wealth meaning an abundance of items of economic value, or the state of controlling or possessing such items, and encompasses money, real estate and personal property.

While there are wealthy individuals in Maldives, creating wealth to allow mass participation has come only recently.

The Maldives Stock Exchange also known as The Securities Trading Floor (STF) was established on 14 April 2002.

Stocks exchanges do not exist to redistribute wealth, but they facilitate companies to expand their business and increase their market share. They also allow investors to invest in shares who then get a chance to get dividends and share in the wealth of profitable businesses.

At any stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth.

An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

United States is the world's largest economy and the New York Stock Exchange is the largest stock exchange in the world.

Anyone who is following the global stock markets knows that the US housing industry is in a deep downturn now.

Stock markets across the globe have been rattled badly by a rise in defaults on U.S. subprime mortgages, loans to borrowers with poor credit histories. The reason: U.S. investment banks package lots of mortgages together and sell them like stocks and bonds to banks and investors around the world.

While the Maldives Stock market is very small and isolated from the global market, the global market swings does have an impact on our economy, especially when the world oil prices increase as we have seen recently.

Maldivian economy is heavily dependent on oil, to drive its tourism, construction and other industries forward.

Maldives has experienced rapid economic growth and development in recent years, supported by a dynamic tourism sector. However, the tsunami of December 2004 gave us an awakening of our economy's susceptibility to factors beyond our control. This came after the decline in tourism following the September 11 terrorist attacks in USA.

According to an MMA article, the Maldivian government has announced plans to introduce a corporate profit tax in the next few years.

When this happens there will be several companies who will fudge their accounts just like the vast number of traders who under invoice the value of the goods they import to Maldives in order to pay reduced import duty- an important source of revenue to the Maldivian government.

Therefore more scrutiny and oversight would be required to check the accounts of the publicly traded companies in the Stock Exchange of Maldives.

In other words, the investing public should not assume that just by buying stocks of listed companies, they are guaranteed a return on investment in the form dividends year after year.

When we look at the United States, the bastion of capitalism and the free market, some prominent examples of fraud and bankruptcies have caused millions of dollars of losses to investors.

Corporate America was shocked and the general public was outraged when Enron and WorldCom, giants in their respective field of energy and telecommnications declared bankrupcy with their top executives involved in fraud.

Not too long ago, perhaps many will still remember the young financial trader Nick Leeson who brought the oldest merchant bank in UK, The Barings Bank to its knees when he overtraded and lost USD 1.4 billion, twice the available trading capital at the bank.

The lessons that we can draw from these incidents is that the stock market while it can make it possible for a person to make money, it can also cause huge losses to investors.

Thus, when a investor buys MTDC (Maldives Tourism Development Corporation) stock, it should not be assumed that such investor will continue to make dividends year after year.

Investors always have a responsibility to find out about the companies they invest in and not become complacent in their scrutiny of how the companies are run.

The free media also has an important role to inform and educate the public of the risks in the market.

From time to time smart crooks will appear to manipulate the system and take advantage of unsuspecting employees and investors. If employees and investors remain vigilant, this challenge can be met.

Maldives is now talking about good governance these days and we should hope the regulating authority keeps its end of the bargain to make sure that smart crooks don't rob the ordinary investors through fraud in the capital market of Maldives.

This is especially important for Maldives, because ordinary people will buy shares with their life savings and their lives will be shattered if the crooks get the better of them.

Ordinary investing members of the public cannot take the shock of a huge loss since we do not even have the safety net of universal health care or adequate social benefits that they can fall back on, should their investments go wrong.