Have Stocks Become Old Fashioned?

December 10, 2012
by Kyle Taylor
Founder

I was reading an article the other day about how less and less companies are now offering share certificates to their stockholders.  In fact, it is not even required that companies issue stock certificates anymore, and over 400 do not offer them at all.  It makes me really wonder if stocks are just becoming old fashioned, especially with the wide variety of financial products that are out there.  Here are some thoughts on whether stocks are becoming old-fashioned financial instruments.

The Rise of Electronic Trading

The biggest thing that has changed over the last few decades is the rise of electronic trading, and so anyone can trade anything without having to incur large transaction costs.  This has really made stocks an old fashioned, almost gentleman’s security instrument.

No longer does someone need to have an advisor to help him or her invest.  Instead, they can click a mouse a few times and it’s done.  No more need for paper shares, and no more need for investment companies.  This just makes stocks seem old fashioned.

New Financial Products

Plus, a wide variety of newer financial products have come out that mimic what investors can do with stocks.  For example, a common non-security instrument that has become popular over the last few years is spread betting.  This is a private transaction that takes place off the exchange, but still focuses on the value of a company.

The same thing is true for CFDs, or Contracts for Difference.  This is another derivative product that you can trade that is similar to stocks, but not quite.  You can trade CFDs with CMC Markets or other companies that offer the service.  This type of derivative allows you to invest in the movement of a company’s share price, without actually owning the stock.

They’re Probably Here To Stay

The truth is, even though they are one of the oldest financial instruments, and they may seem outdated and old fashioned; trading stocks is here to stay.  From a financial perspective, companies need a way to raise money on the equity market, not just through debt.  Equity also offers investors a different way to profit by owning a company, and provides liquidity to the marketplace.

For traders, even though there are so many different mechanisms for exchange, especially electronic, there will still always be a need for stocks.  For example, even new financial products like spread betting and contracts for difference rely on stocks for their underlying value.

Beyond the derivatives market, there are thousands and thousands of financial products that rely on individual stocks.  For example, mutual funds and exchange-traded funds both own baskets of stocks.  These products couldn’t exist without individual stocks.  Plus, many retirement funds also rely on stocks to fund their employee’s retirements, which is key.

So, even though there are a lot of changes happening in the financial markets, and stocks may be old-fashioned, they are here to stay for years and years to come.

by Kyle Taylor
Kyle is the founder of ThePennyHoarder.com

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