AS THE INVESTMENT companies have an increasingly great value of portfolio securities, their influence on the securities markets is bound to increase. Although at this time, their influence is minimal, if their growth of expansion continues at the present rate, they will of necessity exert some influence in the future. It is the contention of this chapter that the potential effect will be a beneficent one that will contribute not to greater fluctuation, but rather to stabilization.
The economic danger of a widely fluctuating securities market is in the implications it has for investment. Since prospective yields on investment are uncertain, the more uncertain is the market the greater will be the danger of uneconomic investment, and the greater the chance of loss to the investor, who is said to increase investment as the rate of interest rises. The very instability of the market, in fact, is likely to be a deterrent to equity investment.
The primary reasons for fluctuation in the market, according to Lord Keynes, are four:1