Do I invest on the Stock Exchange or open my own business?

25.APR.08

Question:It has been suggested that trading on the Stock Exchange may be more lucrative than owning your own business. Is this true?

To understand this perspective clearly, let us go back to first principles. A fundamental reality of the economic system is that the factors of production, which are land, labour and capital, are scarce. Therefore, economic agents, in choosing to use resources in a particular way are implicitly incurring an opportunity cost, which is the benefit of the next best alternative.{{more}} As a result, the economic system would want resources to flow to the most efficient producers in order to optimize the use of resources. The way the system achieves this is by aligning individual self-interest with the system-wide objective of resource optimization. In other words, the persons who make the most money from resources for themselves and the system as a whole are the ones who would obtain the most resources. For example, the entrepreneurs whose businesses are most profitable are the ones who would get the most capital from the bank and hire the best talent. Similarly the companies listed on the stock market, which yield the best returns, are the ones whose shares would appreciate because of the increased demand from investors. In this way the interest of the investor as well as the system are aligned. The investor gets the best return for his capital and the system allows more capital to flow to that company who is able to pay such a good return on capital. Applying this to the question of opening your own business, the reasoning is clear. If you can earn the same or more by just buying shares on the stock exchange, from a purely economic point of view, you would not want to open your own business because not only is it a cost in terms of monetary value foregone, but it is also a drain on your time which could be used in doing something else which could earn you even more money. Only if the return from your own business exceeds the return from the stock market plus the extra income you can earn from having more time should a business be opened up.

My guess is that it is only in rare circumstances that a start-up business would make more than the large companies in certain economic sectors of the local stock exchange, never mind the costs in time. By following this principle, only entrepreneurs who can outperform the stock market, that is, the next best alternative, would open businesses and hence resources would be optimized. Individuals who cannot outperform the market would give their funds to the listed companies, which would be able to grow and expand, employ more people and pay more taxes to the Government, which would eventually result in more public goods and a higher standard of living. The investors who do not open their own businesses but invest in the stock market would now have more time to invest their skills in other areas of importance critical to the process of nation building. Fulfillment will then come from doing what you are the best at doing. Fulfillment cannot come from doing something you are not good at. The system ensures that.

All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however, neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

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