The Gift of Understanding Part II

Dwain J. Kyles
Managing Member of DX Capital Partners

… Even fewer people really understand how stock exchanges work, or the vital role that they play in providing a ‘protected’ marketplace where the stocks of America’s most powerful companies are traded daily, providing the capital, also described as liquidity, to operate and grow their companies.

More than 20 years ago, I met Joe Cecala.

There is no way that I could have known that our informal get together at a coffee shop on LaSalle Street would result in changing the trajectory of my life and that of my family for generations to come. More importantly, our friendship and ultimate partnership, along with the very hard work of some really smart, dedicated persons, stands to revitalize segments of our economy that have been largely marginalized and left behind over a number of generations. I can’t go into this part of our story in much more detail here, because it would take a lot more time and space than I have today. Stay tuned, however, our story will be told and will hopefully encourage young, and not-so-young, people in underserved communities across the country to join us in our movement to create a rising tide that will lift many, many boats! 

Let’s get back to the Reader’s Digest version of how Joe helped me to understand the role of the stock market in building the businesses and economy that is the greatest ever known to mankind. It was through our mutual desire and efforts … including subsequent failures … to help finance the businesses of persons from our own underserved communities that we learned to trust and support each other, no matter what. As our families grew closer and we worked to help each other in our own business challenges, as well as those of our clients, standing shoulder to shoulder, it became abundantly clear that we would not be satisfied until we were able to create solutions that were capable of having systemic impact.  

Having been one of the founders of Archipelago, the company that would ultimately become an independent stock exchange before it was acquired by the New York Stock Exchange, which helped to usher in the new era of electronic stock trading back in the late 1990’s, Joe had a deep understanding of how the stock market, and more importantly, stock exchanges work. This knowledge, coupled with a deep and abiding love for people and ingrained dedication to use his knowledge and skills to improve the lives of the people who came into his orbit, created the perfect setting for someone like me.  As I learned more about what Joe could do, and what he wanted to do, I committed myself to learning as much as I could about the financial industry to help him to do what he wanted to do, while helping my clients do what they were trying to do … only better.  

Joe was very generous with his knowledge, and I would like to think that I was an avid student.

I learned that when commentators on these high-brow financial news shows are talking about the stock market, also known as the public capital markets, they are essentially referencing a pool of money that exceeds $30 trillion!  While most of us are familiar with the idea of the stock market, few of us understand how it works, or how it impacts our economy, much less our daily lives. More importantly, even fewer people really understand how stock exchanges work, or the vital role that they play in providing a ‘protected’ marketplace where the stocks of America’s most powerful companies are traded daily, providing the capital, also described as liquidity, to operate and grow their companies.  

I learned about publicly listed companies, who are the only ones authorized to ‘participate in’ or have access to this huge pool of money. That said access is only granted after having met the requirements presented through a process called an Initial Public Offering, or IPO. Imagine that.  With literally millions of companies operating in America today, just over 6000 of them are granted this designation and access. Rather than getting bogged down in the elusive, but fair, question as to why there are so few companies, relatively speaking, accessing this public capital market, let’s focus on another aspect of this equation. For the past 20 years or so, the number of annual IPO’s has seen a significant decline, creating serious concerns with economists, as well as the financial community, our Congressional representatives and the governmental agencies tasked with tracking and improving this environment. What this means, essentially, is that the businesses most responsible for growing and sustaining our robust economy and the good-paying jobs that generally accompany it, have been growing at a slower pace. Why? 

Before we dig into that question, let’s make sure that we are clear on a few of the fundamentals that help explain what’s going on. The ownership interest in a corporation is generally represented by the Stock’ of a corporation, as indicated by physical stock certificates or by what is called the “book entry” system, recording the ownership interest in the books and records of the depository holding stock for the national market system. Thus, ownership in the stock represents an ownership interest in a corporation. The prices of these stocks fluctuate as a factor of the perceived value of the companies that have issued them in the capital markets. Stock exchanges like the New York Stock Exchange, the Nasdaq Stock Market and the Members Exchange play an important role as the marketplace, the facilitators of the sales between buyers and sellers of stock. Exchanges must work hard to make sure that these transactions, as well as the companies who are selling stock, follow the securities laws and the accompanying rules, particularly those set out by United States Securities and Exchange Commission (“SEC”) in SEC regulations, so that buyers (or investors) in the marketplace are provided with some protections, to the extent possible, from unscrupulous or inept corporate leaders.   

This regulatory environment, though the source of continuing, sometime heated, debates, is undeniably responsible for creating the strongest, most successful financial system in the history of the world.

So, when we talk about companies having access to this huge pool of public capital, we are talking about “patient capital” which arguably is the single best kind of capital for growing, or scaling, a business. That is because the investors are not lenders, they are people who are buying into the likelihood of your success and a subsequent return on their investment, which means these investors are prepared to give their investments some time to bring the promise of profits, and the dividends their investments generate, to fruition. This is unlike a bank loan, which must be paid back in increments starting within weeks of acquiring the funding, or investments by venture capitalists or private equity players, who will often take a more active role in the operations of one’s company.  

To fully appreciate the extraordinary opportunity presented by Dream Exchange, and even more so by our proposed Venture Exchange, I will have to provide some insights that cannot be covered in this blog.  I know, I know, this is starting to feel a little like “bait & switch”, but that’s only because I’ve never tried to explain this in writing before and had no idea it would take up so much ink.  So, I’ve decided that I’m going to try to cover the other highlights in a third blog entry.  If there seems to be any substantial interest in what I have to say, then I will commit to additional blogs that address your questions about how all this stuff works, hopefully making it more accessible for new investors to pursue this specialized knowledge. 

So with that … I encourage you to check out my Part 3, which will be here soon. Thanks for your time and interest. 

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