Given the continuing drop in stock prices of listed companies globally, some people have wondered why the markets have not closed or paused for longer periods to avoid ever-expanding erosion of value (albeit some stocks have come back of late). The reasons are as follows:
1) Liquidity – when markets are open, market participants can dispose of positions and get some money which may be needed in dire times such as now.
2) Price discovery – The other reason has to do with what the market is thinking about the future prospects of certain stocks, or even sectors. Recall the famous phrase, attributed to Warren Buffet: “Only when the tide goes out do you discover who's been swimming naked.” In a likewise manner, the pandemic has exposed managements which have been doing less than stellar jobs. Keeping the markets open allows market participants to determine which stocks to keep and which to dump. After all, the stock market should be about the future prospects of the entity.
Markets are efficient when information is readily available and can be acted upon. That is also why short-selling is still in place even in a period when asset declines seem to be the order of the day. Hence, the pressure of hedge funds on the European countries which have banned short-selling recently.
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