The Securities and Exchange Commission chairman Tahir Mahmood’s high octane statement on the stock market crash has prompted a fierce debate among academics and policy makers. The Chairman announced new protections against market volatility, aiming to avert a repeat of the 2008 market crash.

The experts, however, have their concerns about the capacity of the SECP to avert the crisis as its past record leaves much to be desired. There is a seeming inevitability about how this debate will evolve.

Even if steps are taken to avert the crisis, it is important to understand that the best conceived and executed plans leave open the possibility of failure. Hence such sweeping statements of the regulator might attract the wrath of the investors when they fail to get desired results, say experts familiar with the subject.

The regulators who are today praised for their vigilance would be denounced for their neglect, and would come under pressure to compensate the losers. The need is thus, that the regulator should make sure that naive investors do not end up committing a large portion of their assets in risky business.

According to experts, the stock market very much relies on perception. When the market is perceived as healthy — meaning the rupee is strong, the trade deficit is narrow, and the value of companies is high — investment produces investment. When things look dismal, however, a chain reaction of misfortune tends to occur. The disaster of one segment of the economy can lead to another and so on. In 2008, things began to look bleak on the Pakistan stock market. This was thanks in large part to the investors’ naivety and naivety is “as much of a problem as criminality.”

The stock market is one of the most brilliant financial institutions ever created, fulfills the need of capital that businesses are looking for, while letting investors profit as shareholders in companies. It is pertinent to mention here that the traditional financial asset classes such as the National Savings Schemes and prize bonds have barely kept up with inflation while bank deposits have actually provided negative real return thus causing loss of savers’ purchasing power.

These are exciting times to be an investor in Pakistan’s equity markets. The KSE-100 index has generated robust returns of 52% in 2013. The demutualization of bourses has helped investors to regain their confidence in the market but to avoid a recurrence of the 2008 turmoil in Pakistan, much still has to be done. Understandably, there’s a lot of euphoria amongst investors. The massive movement into our stock markets has provided new opportunities. But it has also increased the risks. While some of today’s optimism is justified – some of it is not.

The investor needs to remember that the strong gains over the last few years are the exception – not the rule. For a country such as Pakistan trying to develop an equity culture when millions of its citizens have long been out of the formal financial system, this is an absolute must on the part of the regulator; appropriate advice should go to the investors about the precautions during and after trading.

People often ignore the fact that making money on the stock market is not possible by taking uninformed decisions. Trading stocks require a substantial amount of study and understanding, before you put your hard-earned money on the line and begin making profits. Investors need to be inquisitive and choosy with their hard earned money. The renewed interest of investors in our equities has the impetus for doing what many, including myself, have repeatedly called for: the promotion of ethical values in business and industry.

There are no short cuts to becoming rich and the same applies to making money on the stock market. There is no easy money to make here, but it may be the easiest path to lose money; if you naively invest money like buying a lottery ticket. Having relevant knowledge and understanding how to evaluate the worth and potential of a stock, before going ahead is very important. Therefore, investor education is a key ingredient for the growth of any capital market as individual investors lack the resources to make informed decisions and develop rational risk-return expectations. The willingness and ability to bear risk needs to be evaluated in the correct framework.

Also, since bourses are marketed for long-term capital, a long-term orientation is a critical ingredient for investment success. Unfortunately, in a developing country like Pakistan, where needs outstrip earning ability, some retail-investors do not approach the capital markets with rational expected returns consistent with their risk profile. Such a situation results in unfavorable outcomes for the uninformed. Small investors usually avoid stocks of large and stable companies because these stocks are expensive. They think it is easier to make money in stocks currently trading at Rs. 20 a share than those trading at Rs. 200. Hence, they usually end up trading in small-cap stocks. Unfortunately, these small-cap stocks are highly fluctuating for earnings profile. The experts of the equity market have the consensus that when overall market undergoes a correction, prices of such stocks fall by a much higher proportion.

Today, investors have access to timely information that was virtually unthinkable just a few years ago. But, strangely enough, very few people read the company’s annual report or do independent research before their investment decisions. They just rely on the market’s predictions.

Brokers are the key players in the markets that act on behalf of the investors. Due to the non-professional, non-certified brokers of the stock markets, investors have suffered huge losses. Every day, self-appointed financial gurus set forth their views as to why the market is about to crash. They may be right or wrong. It doesn’t matter to them. They know that if they make the prediction often enough, it increases the likelihood they will be right and investors might get tempted to rely on their forecasts in making investment decisions.

Most analysts work for firms that have business relationships with the same companies these analysts cover. And analysts’ paychecks are typically tied to the performance of their employers. You can imagine how unpopular an analyst who downgrades his firm’s best client would be.

Consequently, investors are confronted with a number of choices and opportunities. And those options can easily overwhelm and intimidate the most financially savvy person. In this day and age, there simply is no substitute for a person’s awareness and caution.

The capital market is the domain of the Securities and Exchange Commission of Pakistan (SECP) and being the apex regulator it’s the responsibility of the SECP to ensure development, transparency and efficiency in stock market operations. The SECP as an apex regulator should play its part in making the investor informed and empowered in evaluating different financial products. The non-implementation of the 2012 investor education programme could give an opportunity to critics to reiterate their stance on regulators’ incapacity to act on investor welfare. Inevitably, they will persist for overhauling the regulatory mechanism.

The writer is a business and economics columnist.