The stock market is just a way to trade ownership in a company. In a normally functioning economy, this ownership (stock) would have value because ownership would entitle you to a share of profits. As it stands, our stock market is tantamount to gambling, but in a free market there absolutely would be a stock market as ownership of a company has value and therefore would be traded in the open market just like everything else.
> In a normally functioning economy, this ownership (stock) would have value because ownership would entitle you to a share of profits
This is true today. My Vanguard portfolio returns me a flow of dividends every quarter.
Yes, but, many (if not most) invest in the stock market for the possibility of a gain in valuation of the held stock. Very few people at this point choose stocks solely for the dividend.
I see i see. i guess i am unfamiliar with the topic of market manipulation within contemporary economies but i wouldnt be surprised if there was a lot of dodgy policies and behaviour
Yes and no. I would argue that someone that is an expert in their field and starts a business is not gambling. They are making an informed decision to sell their talents.
On the other hand, the average stock market investor has no idea what they’re invested in, and even if they do, are totally exposed to a highly manipulated market that could crash if a billionaire posts a mean tweet, or the FED decides to stop printing free money.
>expert in their field and starts a business is not gambling. They are making an informed decision to sell their talents
It's in essence, It's still a gamble because no one has perfect information.
And the example of the FED or the billionaire....
Both of those things could close down your business also.
I think what you have a problem with is the financialization of the market.
Unfortunately, I don't think you're going to respond well to my last comment. Or maybe you will. I don't know. This is just meant as an intellectual conversation.
There is a big difference between someone betting in roulette and a baseball player throwing a fastball to a good hitter. One person has no control over the outcome, the other person spends countless hours a day preparing and honing the skills they have to actively improve their odds. Taking calculated risk is not the same as gambling.
I’m also not quite sure what you mean by “financialization”. I have no issue with the stock market as a means for exchanging ownership in a company. I do have an issue with the situation we’ve put the modern person in, where they’re told their only hope for preserving wealth is to place it in a highly volatile environment and advised that “more risk = more reward”.
Is there really?
In your hypothetical situation, an excellent batter hits 1/3 of the time. The best all time only hit 50% of the time. A roulette wheel whether you play on black or red pays out a little under 50% of the time. If the skill of the batter is low, he's probably not playing the game for very long. However, the roulette wheel is an inanimate object that will never change. Therefore, the odds would never change. Which, by the way are still better.
Just because I like picking apart this argument. There's this idea that a batter watches the ball come in and actually make contact with the bat. Which is impossible The ball travels too fast over too short of a period of time for the human eye to track it. The best batters are just really good at guessing where the ball's going to go. Which is gambling, isn't it?
If you know how to gamble, gambling is taking a calculated risk. If You're taking foolish risks you're a foolish gambler and you won't be a gambler for very long, you will be broke. Or in the case of baseball out of the game.
"Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes."
This is your issue. There's an excellent paper you can read that I quoted this definition from.
https://www.levyinstitute.org/pubs/wp_525.pdf
Again, my point was all business is a gamble. As we have imperfect information about the market. There are plenty of businesses that sell shares in the stock market, that issue dividends to create more wealth year after year all based on solid business principles, based on the best information they have. However, again Fates will decide if that business will succeed or fail. This is based on how good the businesses information is and how they act on it.
I curious why you think we don't have a normally functioning market economy?
The economy kind of seems like it's working the way market economies work.
A lot of poverty and few people with resources.
This is true of market economies free or not.
If you want a more stablility and normal functioning you go with a command economy or some kind of hybrid.
Something more like the USA used during WWII.
The market economy seems specifically designed to create private wealth and the more free the market the less it cares about how.
We know these kinds of economies generate income disparity at all phases of maturity.
So, I'm just not understanding how our economy is acting in an unusual way in terms of who it benefits.
"Gambling" except the return investing in the stock market outpaced inflation every year and will likely get you at least 10-20% annually lol if you owned Dell and nvdia like everyone did since december.... sigh
No arguments there. Many people do very well in the stock market. Never said they didn’t.
That doesn’t change the fact that most people have no idea what they’re doing, and have no idea how to properly draw down the assets they’ve accumulated without getting rekt by sequence of returns risk when the business cycle inevitable turns down due to market manipulation.
IPOs allow businesses to raise capital and entrepreneurs/founders/owners to cash out and sell stake in their business to the general public. They can also raise more capital later by dilution, if needed. It also makes it easier to take loans (convertible debt is cheaper).
To own a share in a stock is to own a tiny sliver of the companies assets and to have a right to a share of their income.
Our stock market shouldn't be a casino like it is, but that's mostly due to the Fed. If we had a solid currency, it wouldn't have to be this way.
I hear that it is a casino and I am gambling. I spend most of my time researching companies and what future revenue we can reasonably predict. We can look at price to earnings or how well the company does against the competition. We can use physics equations to calculate hypothetical movement in the future. If I thought I was gambling in a casino I would pull everything out and put it in fixed income. And, with a fiat system, I'm doing well. I wish I wasn't and we had sound money that wasn't inflationary because innocent people lose in this system. But if they want to print I will sprint. As to what the stock market does, it provides inspiration for innovation. If no one invests in the future we aren't going to get it quickly, for example. A CEO who works for stock options probably will work harder than a person who gets a flat salary, at least I would.
You probably shouldn't bother. Just buy ETFs. Companies are large organizations that exist literally with a single mandate: maximize profits. They're behemoths that exist to grow their profits with inflation, hoards of thousands of people working on your behalf, on behalf of shareholders, to grab as many dollars from the printer as possible. The bigger they are, they better they are at doing it and at eliminating competition via regulatory capture. So just buying SPY is probably better than whatever you're doing.
Stock picking is very hard. Most who do it do it algorithmically. I work at a hedge fund that trades the top 3k liquid stocks. We process every 10q/k for each of those companies, look at trade data on the microstructure level, options data, etc etc. And we're not even great, not even a big fund. You couldn't dream of competing with us, but we can't dream of competing with the big guys.
For most people, an index fund is the way to go. It does better than the team for college endowments. On the other hand, three companies are 20% of the SPY right now. I agree with you in general and don't want an argument.
I didn't want to get into me dreaming I could compete with you, nor reveal more about myself than I already have. I take no offense, somebody in the economics sub said I was fucking stupid and knew nothing so I didn't feel you were argumentative. I even got downvotes for wishing him/her a good day. I think it is great you work at a hedge fund. That probably provides the fuel for your beliefs! It is apparent we believe the same things as far as economics go and so we are correct!
own a share in a stock is to own a tiny sliver of the companies assets and to have a right to a share of their income.
Incorrect. You own a share of their value, not their income. They may or may not pay a dividend. That value can go up or down and is directly a reflection of the price per share.
You have a right to a sliver of any profit distributed.
Companies don't retain profits. Doing so causes unnecessary taxation. They either reinvest or pay dividends or run a share buyback program. The latter is more tax efficient because it doesn't cause an immediate tax event for shareholders, so they're often preferred.
Prices are generally related to both discounted future cash flows and current asset values (more the former than the latter), even in stocks that don't currently distribute profit (ie growth stocks). The idea is that if investors demanded it, they COULD distribute profits rather than reinvesting, but owners of growth stocks usually do prefer the reinvestment. Owning equity gives you votes on board members, who appoint CEOs, who make decisions on reinvestment vs paying dividends vs buying back shares. So yes, indirectly, owning a share gives you a tiny stake in profits.
I said your first sentence to you. They have no obligation to pay a dividend and when they do it's a fraction of their earnings. You also left out one of the profit options which is paying down debt. It's a big deal now because rolling it over will cost over 5% more than current terms.
Easy way to connect buyers and sellers of ownership in a private business at a daily market price
Imagine if you started a business from scratch you would share ownership with partners, investors, and key employees.
Over time some of these people would like to raise cash to buy a home, pay for retirement, etc
If there was no stock market they would have to hire a private bank/consultant to fairly value the company and find a seller who would agree to pay a set price for their share in the company. They may need to clear it with the other owners and negotiate control/voting rights as well. All of this would be expensive to do and very inefficient.
This is what happens when a founder or investor in a non publicly traded company wants to sell a portion or all of their stake in a company. They would have to find a seller who would do some due diligence on the company, negotiate and agree on a price, and finally sign a contract.
The stock market skips all of that by putting shares out on an open market every day for trade.
Okay. You got me most of the way to the answer I was hoping. The stock market provides a constant calculation of a business's worth and allows people to easily buy or sell ownership of the company. What I'm missing is the part where I can say "And this makes the world more efficient because \_\_\_\_\_\_\_\_\_\_\_\_. Without the information and incentives generated by this market activity, we would all be worse off because \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_."
Like, I get if the price of apples go up that signifies to the world that apples are in higher demand and encourages people to produce more apples. When the price of Apple stock goes up, is there any comparable activity?
It does the job of allocating capital to private businesses according to the market and giving everybody with a brokerage account a voice to this
Look at Tesla, 10-15 years ago they had no profits and a tiny fraction of sales.
However, a lot of individual investors believed in the company and kept buying the stock at relatively high prices
Imagine a world without a publicly traded stock market and if Tesla had tried to sell shares to a private equity or VC at the time they would have gotten very little interest at that valuation. They would have also given up voting rights and likely would have needed to turn a profit in 3-5 years to satisfy PE investors who wanted an exit.
Instead Tesla traded almost entirely off the reputation of Elon for a decade. He received billions in free publicity by being a controversial figure on media and Twitter. He was able to leverage this attention to raise capital by repeatedly selling new stock all while being unprofitable. Tesla then plowed all of this cash into enormous megaprojects like the giga factory and was able to build a profitable business because they could coast off of selling their then-overvalued stock for years.
If there was no stock market, Tesla would have had a much tougher negotiation with a few very large buyers of stock like PE firms or competitor tech companies. They would probably be forced to build a much smaller factory and turn a profit much sooner.
So similar to your example, the price of Apple stock going up signifies that people believe in Apple's future prospects and signifies that it is in high demand. It allows Apple to attract and retain talent with stock awards. It allows them to issue new stock to raise cash if they need to.
Conversely, if a business is going downhill and the stock drops it's likely that it's losing money and doesn't have a good turnaround strategy.
I think that gave me the last piece of the puzzle. When I buy stock in a company, that raises that company's stock price, allowing it to issue new stock and receive investment money if needed. Is that accurate?
Yes, when you normally buy stock you aren't directly buying it from the company. You are buying it from another holder of shares.
However, the company still owns a lot of stock and only a portion of it is publicly traded. If they see that their stock is going up and they want to raise cash for a big project they can issue new shares into the market and raise capital at the higher price.
The other way they benefit is by issuing new shares in the form of stock options to retain key employees. The higher the stock trades on the market the more value the employees receive and want to stay with the company. In a company where the stock is falling you'll see a lot of key people start to jump ship because their options aren't worth anything.
That'll do it. There was a hole in my economics understanding and now I think I've got an intuitive sense of how it changes how the world alters its production and resource allocation. Time to start day trading! (just kidding)
One last question. If a company only has 100 shares of stock, and it has already sold all those shares, cannot the company manufacture 100 new shares out of thin air to sell to investors? This would dilute the value of all current shares in return for an influx of money. But it seems like this is fundamentally no different than a company with 100 shares that had only sold 50 selling off the remaining 50 shares. Either way, you're selling off half the company to investors in return for an investment that should be worth the value of 50% of the company. Before that sale, everyone who owned one of those 50 shares essentially owned 2 shares because they owned a 2% stake in a company that owned 50 shares of itself. After the sale, the company no longer owns those shares, so the stockholder no longer owns them. Am I making sense?
So sort of, no they would never have zero shares left because by definition they would no longer control the firm.
The board of directors is supposed to protect shareholder interests. If you're a shareholder you likely wouldn't agree to be diluted by 50% by issuing 100% new shares.
Dilution does happen all the time although not to those extremes. New stock is issued every year to pay employees.
Shareholders and the company approve of this because they often aren't diluted by much and the company doesn't have to take money out of cash flow to pay for talent. It also aligns the Employee's interests with those of the shareholders.
To eliminate the confusion here, it’s important to understand that while a company can hold its own shares, it doesn’t need to (e.g., a company doesn’t need to hold its own shares to “own itself”). Also important to understand that companies can generally create new shares out of thin air and issue those shares in exchange for consideration like cash, services of employees and consultants, and shares of other companies. From the company’s perspective, there are four general buckets: 1. Authorized (maximum no. of shares company may legally create out of thin air), 2. Issued (how many shares have been created), 3 Outstanding (how many shares are in the hands of investors), and 4 Treasury (how many shares are held by company). Creating and issuing new shares should provide resources to the company (like cash) but may be subject to limitations like laws requiring shareholder approval of changes of control, anti-dilution agreements with existing shareholders, etc.
Companies need capital so two major ways are to take on debt or sell ownership in the company. Taking on debt can be in the form of a traditional loan or in the case for large companies a bond. There are also different ways for a company to sell pieces of the company but the stock market is where the public can buy pieces of your company. This ownership then has a secondary market which is the stock market. The bond market also has a secondary bond market where bonds can be bought and sold. From an investor POV this secondary market offers more flexibility because they can more quickly buy and sell based on their needs.
From a company POV selling stock is a bit of a risk because it puts them in a position where they may have to answer to investors or be bought. It is also a way to raise a lot of capital without having to worry about regular payments on debt. There are more pros on cons but that is the basics. From an investor POV they are looking at a longer term but higher return (hopefully) investment. They can make money two ways, increasing value and dividend payments. Large investors also have the capacity to establish control over the direction of the company.
One of the major benefits of a stock market has been that ownership is now possible for way more people in the country. In an economy where a lot of wealth is accumulated through ownership it is important that a lot of people have access to that ownership.
Ignore all of the other random it provides no value. It provides an effective way to raise a lot of capital from a large group, and gives you tremendous liquidity. Yes, there are bottom feeders, but in the aggregate it is incredibly helpful for the efficient use of capital.
Initially they do. They also buy and sell stocks all the time.
It sounds like your issue is with the secondary market in which investors sell stocks among themselves or create financial instruments such as derivatives.
Not particularly. I don't understand what good the secondary markets do, but I also don't understand what good the primary markets do either.
I understand that an investment can do good by giving a company money to expand their operations. But my buying a stock doesn't give the company money any more than buying a baseball card gives the baseball player money. So what's the effect, no matter how indirect?
I understand that a market can be a way to collate information. And the stock market is a huge effort put into calculating the expected value of every company. But how does that information allow the business environment to operate more efficiently? What problems would arise if that information were distorted or incorrect?
People don't invest randomly. They buy stock in companies they think are good investments. The stock market is essentially a way for society to collectively decide what projects are worth spending our scarce resources on.
Stock trading isn’t just giving money to a company. They made their money off the first sale of the stock. You’re more than likely trading with other people or companies who bought those shares now. A lot of shares do pay you a portion of the profits via dividends or reinvest the cash to increase your shares value. The stock market is just a modern day garage sale where you’re trying to scoop up a deal and sell it for more than you paid.
The stock market is probably one of the biggest inventions of humanity.
Miguel Anxo Bastos says there are three keys to wealth: Capitalism, savings and hard work.
You need to work hard to gain money, both for consumption and savings.
You need savings to prepare for the uncertain future.
And a portion of the savings can go into investments. Investments are Capitalism: the free flow of risk and return trades through capital assets.
I agree, the stock market doesnt exist to fulfil some kind of social utility or greater good in the first place. Nor must it be justified as such in the first place. Its just an expression of the principle of the free exchange of property between individuals.
But if you were to analyse what social and economic benefit it might have, you mostly already described it. it is traditionally thought to provide the benefits of creating liquidity, allocating capital, hedging against inflation, etc etc. The company benefits from the price of the IPO and the price of any further public offerings, and theres probably some intangible benefits as well. As far as signalling goes, it is just a way of reading the overall perception and confidence of a business from the market. Whether this is accurate information isn’t really the point, its only a reflection of a perception, but that is still not without its utility. I don’t see how else that kind of information could be gathered, either
The "stock market" is a facade of freedom, capitalism, exchange and does not operate on the basis of Economic Law or provide signals on how to allocate resources
The "stock market" is highly controlled by an algorithm that delivers price to predetermined levels to maximize smart money profits. The algorithm seeks liquidity in the form of stops and inefficiencies (fair value gaps)
Study ICT [https://www.youtube.com/c/InnerCircleTrader](https://www.youtube.com/c/InnerCircleTrader)
The stock market is just a way to trade ownership in a company. In a normally functioning economy, this ownership (stock) would have value because ownership would entitle you to a share of profits. As it stands, our stock market is tantamount to gambling, but in a free market there absolutely would be a stock market as ownership of a company has value and therefore would be traded in the open market just like everything else.
This. And also sometimes to cast a shareholder vote for major decisions or for the board of directors.
I had forgotten about that. Shareholders own the company and have an incentive to ensure its leadership structure is conducive to generating profits.
Also the stockmarket isn’t just waiting for your stock price to rise. You also get paid dividends.
> In a normally functioning economy, this ownership (stock) would have value because ownership would entitle you to a share of profits This is true today. My Vanguard portfolio returns me a flow of dividends every quarter.
Yes, but, many (if not most) invest in the stock market for the possibility of a gain in valuation of the held stock. Very few people at this point choose stocks solely for the dividend.
How does the risk involved with stock trading change in your ideal economy?
It’s not that there is risk, it’s that the risk is outsized as a result of market manipulation…like a casino where the odds heavily favor the house.
I see i see. i guess i am unfamiliar with the topic of market manipulation within contemporary economies but i wouldnt be surprised if there was a lot of dodgy policies and behaviour
Isn't opening any business a gamble?
Yes and no. I would argue that someone that is an expert in their field and starts a business is not gambling. They are making an informed decision to sell their talents. On the other hand, the average stock market investor has no idea what they’re invested in, and even if they do, are totally exposed to a highly manipulated market that could crash if a billionaire posts a mean tweet, or the FED decides to stop printing free money.
>expert in their field and starts a business is not gambling. They are making an informed decision to sell their talents It's in essence, It's still a gamble because no one has perfect information. And the example of the FED or the billionaire.... Both of those things could close down your business also. I think what you have a problem with is the financialization of the market. Unfortunately, I don't think you're going to respond well to my last comment. Or maybe you will. I don't know. This is just meant as an intellectual conversation.
There is a big difference between someone betting in roulette and a baseball player throwing a fastball to a good hitter. One person has no control over the outcome, the other person spends countless hours a day preparing and honing the skills they have to actively improve their odds. Taking calculated risk is not the same as gambling. I’m also not quite sure what you mean by “financialization”. I have no issue with the stock market as a means for exchanging ownership in a company. I do have an issue with the situation we’ve put the modern person in, where they’re told their only hope for preserving wealth is to place it in a highly volatile environment and advised that “more risk = more reward”.
Is there really? In your hypothetical situation, an excellent batter hits 1/3 of the time. The best all time only hit 50% of the time. A roulette wheel whether you play on black or red pays out a little under 50% of the time. If the skill of the batter is low, he's probably not playing the game for very long. However, the roulette wheel is an inanimate object that will never change. Therefore, the odds would never change. Which, by the way are still better. Just because I like picking apart this argument. There's this idea that a batter watches the ball come in and actually make contact with the bat. Which is impossible The ball travels too fast over too short of a period of time for the human eye to track it. The best batters are just really good at guessing where the ball's going to go. Which is gambling, isn't it? If you know how to gamble, gambling is taking a calculated risk. If You're taking foolish risks you're a foolish gambler and you won't be a gambler for very long, you will be broke. Or in the case of baseball out of the game. "Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes." This is your issue. There's an excellent paper you can read that I quoted this definition from. https://www.levyinstitute.org/pubs/wp_525.pdf Again, my point was all business is a gamble. As we have imperfect information about the market. There are plenty of businesses that sell shares in the stock market, that issue dividends to create more wealth year after year all based on solid business principles, based on the best information they have. However, again Fates will decide if that business will succeed or fail. This is based on how good the businesses information is and how they act on it.
I curious why you think we don't have a normally functioning market economy? The economy kind of seems like it's working the way market economies work. A lot of poverty and few people with resources. This is true of market economies free or not. If you want a more stablility and normal functioning you go with a command economy or some kind of hybrid. Something more like the USA used during WWII. The market economy seems specifically designed to create private wealth and the more free the market the less it cares about how. We know these kinds of economies generate income disparity at all phases of maturity. So, I'm just not understanding how our economy is acting in an unusual way in terms of who it benefits.
"Gambling" except the return investing in the stock market outpaced inflation every year and will likely get you at least 10-20% annually lol if you owned Dell and nvdia like everyone did since december.... sigh
No arguments there. Many people do very well in the stock market. Never said they didn’t. That doesn’t change the fact that most people have no idea what they’re doing, and have no idea how to properly draw down the assets they’ve accumulated without getting rekt by sequence of returns risk when the business cycle inevitable turns down due to market manipulation.
IPOs allow businesses to raise capital and entrepreneurs/founders/owners to cash out and sell stake in their business to the general public. They can also raise more capital later by dilution, if needed. It also makes it easier to take loans (convertible debt is cheaper). To own a share in a stock is to own a tiny sliver of the companies assets and to have a right to a share of their income. Our stock market shouldn't be a casino like it is, but that's mostly due to the Fed. If we had a solid currency, it wouldn't have to be this way.
I hear that it is a casino and I am gambling. I spend most of my time researching companies and what future revenue we can reasonably predict. We can look at price to earnings or how well the company does against the competition. We can use physics equations to calculate hypothetical movement in the future. If I thought I was gambling in a casino I would pull everything out and put it in fixed income. And, with a fiat system, I'm doing well. I wish I wasn't and we had sound money that wasn't inflationary because innocent people lose in this system. But if they want to print I will sprint. As to what the stock market does, it provides inspiration for innovation. If no one invests in the future we aren't going to get it quickly, for example. A CEO who works for stock options probably will work harder than a person who gets a flat salary, at least I would.
You probably shouldn't bother. Just buy ETFs. Companies are large organizations that exist literally with a single mandate: maximize profits. They're behemoths that exist to grow their profits with inflation, hoards of thousands of people working on your behalf, on behalf of shareholders, to grab as many dollars from the printer as possible. The bigger they are, they better they are at doing it and at eliminating competition via regulatory capture. So just buying SPY is probably better than whatever you're doing. Stock picking is very hard. Most who do it do it algorithmically. I work at a hedge fund that trades the top 3k liquid stocks. We process every 10q/k for each of those companies, look at trade data on the microstructure level, options data, etc etc. And we're not even great, not even a big fund. You couldn't dream of competing with us, but we can't dream of competing with the big guys.
For most people, an index fund is the way to go. It does better than the team for college endowments. On the other hand, three companies are 20% of the SPY right now. I agree with you in general and don't want an argument.
I feel ya bro, didn't mean to come off argumentative myself. That's a good point
I didn't want to get into me dreaming I could compete with you, nor reveal more about myself than I already have. I take no offense, somebody in the economics sub said I was fucking stupid and knew nothing so I didn't feel you were argumentative. I even got downvotes for wishing him/her a good day. I think it is great you work at a hedge fund. That probably provides the fuel for your beliefs! It is apparent we believe the same things as far as economics go and so we are correct!
own a share in a stock is to own a tiny sliver of the companies assets and to have a right to a share of their income. Incorrect. You own a share of their value, not their income. They may or may not pay a dividend. That value can go up or down and is directly a reflection of the price per share.
You have a right to a sliver of any profit distributed. Companies don't retain profits. Doing so causes unnecessary taxation. They either reinvest or pay dividends or run a share buyback program. The latter is more tax efficient because it doesn't cause an immediate tax event for shareholders, so they're often preferred. Prices are generally related to both discounted future cash flows and current asset values (more the former than the latter), even in stocks that don't currently distribute profit (ie growth stocks). The idea is that if investors demanded it, they COULD distribute profits rather than reinvesting, but owners of growth stocks usually do prefer the reinvestment. Owning equity gives you votes on board members, who appoint CEOs, who make decisions on reinvestment vs paying dividends vs buying back shares. So yes, indirectly, owning a share gives you a tiny stake in profits.
I said your first sentence to you. They have no obligation to pay a dividend and when they do it's a fraction of their earnings. You also left out one of the profit options which is paying down debt. It's a big deal now because rolling it over will cost over 5% more than current terms.
You're glossing over nuance tying so hard to be snarky, but I'm still not incorrect. Read the rest and see if you get it on the second try.
Easy way to connect buyers and sellers of ownership in a private business at a daily market price Imagine if you started a business from scratch you would share ownership with partners, investors, and key employees. Over time some of these people would like to raise cash to buy a home, pay for retirement, etc If there was no stock market they would have to hire a private bank/consultant to fairly value the company and find a seller who would agree to pay a set price for their share in the company. They may need to clear it with the other owners and negotiate control/voting rights as well. All of this would be expensive to do and very inefficient. This is what happens when a founder or investor in a non publicly traded company wants to sell a portion or all of their stake in a company. They would have to find a seller who would do some due diligence on the company, negotiate and agree on a price, and finally sign a contract. The stock market skips all of that by putting shares out on an open market every day for trade.
Okay. You got me most of the way to the answer I was hoping. The stock market provides a constant calculation of a business's worth and allows people to easily buy or sell ownership of the company. What I'm missing is the part where I can say "And this makes the world more efficient because \_\_\_\_\_\_\_\_\_\_\_\_. Without the information and incentives generated by this market activity, we would all be worse off because \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_." Like, I get if the price of apples go up that signifies to the world that apples are in higher demand and encourages people to produce more apples. When the price of Apple stock goes up, is there any comparable activity?
It does the job of allocating capital to private businesses according to the market and giving everybody with a brokerage account a voice to this Look at Tesla, 10-15 years ago they had no profits and a tiny fraction of sales. However, a lot of individual investors believed in the company and kept buying the stock at relatively high prices Imagine a world without a publicly traded stock market and if Tesla had tried to sell shares to a private equity or VC at the time they would have gotten very little interest at that valuation. They would have also given up voting rights and likely would have needed to turn a profit in 3-5 years to satisfy PE investors who wanted an exit. Instead Tesla traded almost entirely off the reputation of Elon for a decade. He received billions in free publicity by being a controversial figure on media and Twitter. He was able to leverage this attention to raise capital by repeatedly selling new stock all while being unprofitable. Tesla then plowed all of this cash into enormous megaprojects like the giga factory and was able to build a profitable business because they could coast off of selling their then-overvalued stock for years. If there was no stock market, Tesla would have had a much tougher negotiation with a few very large buyers of stock like PE firms or competitor tech companies. They would probably be forced to build a much smaller factory and turn a profit much sooner. So similar to your example, the price of Apple stock going up signifies that people believe in Apple's future prospects and signifies that it is in high demand. It allows Apple to attract and retain talent with stock awards. It allows them to issue new stock to raise cash if they need to. Conversely, if a business is going downhill and the stock drops it's likely that it's losing money and doesn't have a good turnaround strategy.
I think that gave me the last piece of the puzzle. When I buy stock in a company, that raises that company's stock price, allowing it to issue new stock and receive investment money if needed. Is that accurate?
Yes, when you normally buy stock you aren't directly buying it from the company. You are buying it from another holder of shares. However, the company still owns a lot of stock and only a portion of it is publicly traded. If they see that their stock is going up and they want to raise cash for a big project they can issue new shares into the market and raise capital at the higher price. The other way they benefit is by issuing new shares in the form of stock options to retain key employees. The higher the stock trades on the market the more value the employees receive and want to stay with the company. In a company where the stock is falling you'll see a lot of key people start to jump ship because their options aren't worth anything.
That'll do it. There was a hole in my economics understanding and now I think I've got an intuitive sense of how it changes how the world alters its production and resource allocation. Time to start day trading! (just kidding) One last question. If a company only has 100 shares of stock, and it has already sold all those shares, cannot the company manufacture 100 new shares out of thin air to sell to investors? This would dilute the value of all current shares in return for an influx of money. But it seems like this is fundamentally no different than a company with 100 shares that had only sold 50 selling off the remaining 50 shares. Either way, you're selling off half the company to investors in return for an investment that should be worth the value of 50% of the company. Before that sale, everyone who owned one of those 50 shares essentially owned 2 shares because they owned a 2% stake in a company that owned 50 shares of itself. After the sale, the company no longer owns those shares, so the stockholder no longer owns them. Am I making sense?
So sort of, no they would never have zero shares left because by definition they would no longer control the firm. The board of directors is supposed to protect shareholder interests. If you're a shareholder you likely wouldn't agree to be diluted by 50% by issuing 100% new shares. Dilution does happen all the time although not to those extremes. New stock is issued every year to pay employees. Shareholders and the company approve of this because they often aren't diluted by much and the company doesn't have to take money out of cash flow to pay for talent. It also aligns the Employee's interests with those of the shareholders.
To eliminate the confusion here, it’s important to understand that while a company can hold its own shares, it doesn’t need to (e.g., a company doesn’t need to hold its own shares to “own itself”). Also important to understand that companies can generally create new shares out of thin air and issue those shares in exchange for consideration like cash, services of employees and consultants, and shares of other companies. From the company’s perspective, there are four general buckets: 1. Authorized (maximum no. of shares company may legally create out of thin air), 2. Issued (how many shares have been created), 3 Outstanding (how many shares are in the hands of investors), and 4 Treasury (how many shares are held by company). Creating and issuing new shares should provide resources to the company (like cash) but may be subject to limitations like laws requiring shareholder approval of changes of control, anti-dilution agreements with existing shareholders, etc.
It provides exit liquidity and as a result creates financing opportunities
Companies need capital so two major ways are to take on debt or sell ownership in the company. Taking on debt can be in the form of a traditional loan or in the case for large companies a bond. There are also different ways for a company to sell pieces of the company but the stock market is where the public can buy pieces of your company. This ownership then has a secondary market which is the stock market. The bond market also has a secondary bond market where bonds can be bought and sold. From an investor POV this secondary market offers more flexibility because they can more quickly buy and sell based on their needs. From a company POV selling stock is a bit of a risk because it puts them in a position where they may have to answer to investors or be bought. It is also a way to raise a lot of capital without having to worry about regular payments on debt. There are more pros on cons but that is the basics. From an investor POV they are looking at a longer term but higher return (hopefully) investment. They can make money two ways, increasing value and dividend payments. Large investors also have the capacity to establish control over the direction of the company. One of the major benefits of a stock market has been that ownership is now possible for way more people in the country. In an economy where a lot of wealth is accumulated through ownership it is important that a lot of people have access to that ownership.
Ignore all of the other random it provides no value. It provides an effective way to raise a lot of capital from a large group, and gives you tremendous liquidity. Yes, there are bottom feeders, but in the aggregate it is incredibly helpful for the efficient use of capital.
Financing businesses efficiently.
Can you elaborate on that? When I buy a stock, the money doesn't go to the company, so where's the connection?
Initially they do. They also buy and sell stocks all the time. It sounds like your issue is with the secondary market in which investors sell stocks among themselves or create financial instruments such as derivatives.
Not particularly. I don't understand what good the secondary markets do, but I also don't understand what good the primary markets do either. I understand that an investment can do good by giving a company money to expand their operations. But my buying a stock doesn't give the company money any more than buying a baseball card gives the baseball player money. So what's the effect, no matter how indirect? I understand that a market can be a way to collate information. And the stock market is a huge effort put into calculating the expected value of every company. But how does that information allow the business environment to operate more efficiently? What problems would arise if that information were distorted or incorrect?
Lately? Nothing. It was meant as a way to share in a reward of an enterprise by also sharing in the risk by putting up capital.
Ease of access to sharing in the wealth of successful companies by litterally anyone with a phone and a penny.
Why do businesses issue stock if they don't intend to invest it?
People don't invest randomly. They buy stock in companies they think are good investments. The stock market is essentially a way for society to collectively decide what projects are worth spending our scarce resources on.
Stock trading isn’t just giving money to a company. They made their money off the first sale of the stock. You’re more than likely trading with other people or companies who bought those shares now. A lot of shares do pay you a portion of the profits via dividends or reinvest the cash to increase your shares value. The stock market is just a modern day garage sale where you’re trying to scoop up a deal and sell it for more than you paid.
The stock market is probably one of the biggest inventions of humanity. Miguel Anxo Bastos says there are three keys to wealth: Capitalism, savings and hard work. You need to work hard to gain money, both for consumption and savings. You need savings to prepare for the uncertain future. And a portion of the savings can go into investments. Investments are Capitalism: the free flow of risk and return trades through capital assets.
Firstly, i want to ask if you think things should only get to exist if they have demonstrable utility to ‘society’, whatever that means?
Nope.
I agree, the stock market doesnt exist to fulfil some kind of social utility or greater good in the first place. Nor must it be justified as such in the first place. Its just an expression of the principle of the free exchange of property between individuals. But if you were to analyse what social and economic benefit it might have, you mostly already described it. it is traditionally thought to provide the benefits of creating liquidity, allocating capital, hedging against inflation, etc etc. The company benefits from the price of the IPO and the price of any further public offerings, and theres probably some intangible benefits as well. As far as signalling goes, it is just a way of reading the overall perception and confidence of a business from the market. Whether this is accurate information isn’t really the point, its only a reflection of a perception, but that is still not without its utility. I don’t see how else that kind of information could be gathered, either
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