Do we need a "Stock Market"?

More and more I'm asking myself this, and I've yet to really see what it's actually needed for. The whole thing seems silly... a bunch of elitists flow around in there waving paper slips around and shouting in some crowd group think frenzy. And nowadays the whole process is so complex that only supercomputers are able to handle it all, and the institutions running these machines can and have screwed basically everyone over with them.

At the very least I can't see any reason whatsoever for "speculation". It's literal gambling, and should be done down in Vegas where people can't lose their livelihoods as a result of the gambling of others. It was the main driving force behind the gas price spikes that went down as the housing market collapsed. Way to go speculation.

These days the stock market is valued at about the same as it was before the big meltdown, and millions of new people are without homes or jobs now, and the rest are rightfully hording their money, yet the 'value' being the same is supposed to make sense?

So if we do need such a thing as a 'stock market', please do explain it.

I hope that at the very least we can spot all of the solutions needed to make it legitimate.

[edit on 31-5-2010 by IgnoranceIsntBlisss]

One of the questions I have with the stock market is ,Where does the money go when a company collapses?,,,

example a stock worth $24 a share and there is 500 shares ,,, there would be accumulative $12,000 of money in the market,, When the company goes belly up that $12,000 disappears in thin air,,can someone explain this to me?

reply to post by rtcctr


Right! I haven't thought about that in a long time. Like when Enron collapsed I couldn't figure out why the employees and stock holders who got screwed weren't able to take all of the actual properties Enron held and sold them to divie up the money.

reply to post by rtcctr


When a stock's value is high, people are ready to pay x amount of dollars for it. If the company chooses, they may sell the shares and walk away with the money. It's sort of like a greater fool theory. The greatest fool gets stuck with the stock when it goes down.

Whoever paid for the stock loses their money, since there is no one in the market to pay them what they paid. The money they lost doesn;t go anywhere, but to the people whom they bought the stock from in the first place.

Let me see if I got it right, stock is x when I invest it goes to 0 all the money I paid goes to the one I bought the stock from

That sounds like a lose-lose to me

Yes. We need a stock market. It is the most efficient way for companies to raise money to create / expand businesses. Many investors would not feel comfortable investing without the liquidity the markets provide, so without the markets you could expect a massive slowdown in investments which is the opposite of what we need.

The fact that there is a market is not the problem. The problem is that regulation and in some instances, a lack of regulation has allowed share prices to be manipulated by a select few. Ultimately a companies worth will be determined by their profits and cash production relative to what folks can get in risk free investments. It can just take some time for the equilibrium to be reached. Over long period sof time the crooked of the markets has little effect on along term diversified investor.

reply to post by sligtlyskeptical


Well said. But I'm still weary of all of this...

Over long period sof time the crooked of the markets has little effect on along term diversified investor.

Who would mainly be elitists?

I think it does hurt people. Look at all the great crashes. Just about everyone (but the elitists who engineer them) loses. All of society loses.

It just seems too much like the machinery to screw people with. A major part of the infrastructure of exploitation.

It has a major darkside, as does both capitalism and communism, or humans, or etc. You can't lose sight of the darkside or it will rise against.

It just seems like there could be better ways to do things considering the danger this system poses.

I also can't shake the feeling that without massive multinational corporations there wouldn't be as much 'need' for it. Tons of businesses don't 'go public'. "Go public", talk about a euphemism.

[edit on 31-5-2010 by IgnoranceIsntBlisss]

Originally posted by rtcctr
Let me see if I got it right, stock is x when I invest it goes to 0 all the money I paid goes to the one I bought the stock from

That sounds like a lose-lose to me

The person you gave your money to probably did ok. Depends what they paid for it. For every ENRON there are a bunch more companies that stay in business and earn may thousands of percent for their shareholders. Despite the recent market troubles those who have bought stocks over the long run have enjoyed much better returns than those in most other asset classes. In exchange for long term superior gains, stockholders subject themselves to greater volatility. That is all we are seeing. 90% of the people in this country give all they make to these corporations and there is nothing on the horizon that will change this.

Making money over long periods of time in stocks is simple, but it isn't easy. Buy some index funds or managed funds and never look back. When you want to call your broker to sell, write a check instead. Your anxiety is your own best contrarian indicator.

All this said, if you try to trade stocks for short term gains, there is a great chance that the Wall Street sharks will skin you alive. They have all your anxieties programmed for maximum profit

Originally posted by IgnoranceIsntBlisss
reply to post by sligtlyskeptical

 

Well said. But I'm still weary of all of this...

Over long period sof time the crooked of the markets has little effect on along term diversified investor.

Who would mainly be elitists?

I think it does hurt people. Look at all the great crashes. Just about everyone (but the elitists who engineer them) loses. All of society loses.

It just seems too much like the machinery to screw people with. A major part of the infrastructure of exploitation.

It has a major darkside, as does both capitalism and communism, or humans, or etc. You can't lose sight of the darkside or it will rise against.

It just seems like there could be better ways to do things considering the danger this system poses.

I also can't shake the feeling that without massive multinational corporations there wouldn't be as much 'need' for it. Tons of businesses don't 'go public'. "Go public", talk about a euphemism.

[edit on 31-5-2010 by IgnoranceIsntBlisss]

Look back through history. Past returns prove me out. Declines hurt those who are retired mostly. On the flip side if they stuck with stocks all the way through too retirement then they still have a bunch more money than they would have had in "safer" investments. For those who aren't retired, market declines have been a tremendous opportunity to invest more.

Thank you for posing this question. It is one that has been on the minds of many and is certainly one worth answering. Since I have some expertise on the subject I will do so now.

Any market is essentially a communication network of buyers and sellers of an asset. Based on the interactions of the buyers and sellers, the value of the asset is determined; we've all seen the standard supply and demand curves. However, I understand that your question is about why do stocks (equities) have value?

The short answer is that there is a supply and demand for those "paper slips" as you termed them. Understanding why that is so requires an examination of the supply and demand. The supply is an aggregation of the creators of the assets. In this case they are a ownership rights in a company. The ownership rights are often endowed with voting rights, entitlement to periodic dividends, and a few minor other minor privileges stipulated by the issuing company. For all practical purposes of 99.9% of investors, companies and individuals alike, the stocks/equities/ownership rights are imaginary. Obviously, the question is why do investors buy something imaginary?

The basic answer is that investors (or savers) desire to convert their excess cash into something that will increase in value. Thus, when one buys a stock he is assuming that he will be able to ultimately convert the asset into more consumption than he initially postponed by buying an illusory asset instead of a car for instance. That assumption is based in another assumption: that another investor will want to buy the asset. Each subsequent investor is making the same set of assumptions.

rtccr: We've arrived at the answer to your question. The $12,000 didn't disappear, it exists in the wealth of the individual from which your imagined investor bought the 500 shares. The asset is a bet in some respects; a supposition that the assets will be can be sold at a later date. Obviously things like accounting fraud undermine the marketablility of an asset. Investors have numerous options from which to choose, ths Thus, as "bad news" is reported, the demand for (and the ability to sell) equity in a fraudulent company is diminished as investors seek more stable options.

In summary, the stock market exists because it's an interest free way for companies to raise capital. It persists because free individuals believe that they can buy those imaginary assets which can be sold later to other investors thinking the same thing.

reply to post by randolrs1


Very well said.

But what about speculation? What rational positive purpose does this serve?

Originally posted by sligtlyskeptical
Look back through history. Past returns prove me out. Declines hurt those who are retired mostly. On the flip side if they stuck with stocks all the way through too retirement then they still have a bunch more money than they would have had in "safer" investments. For those who aren't retired, market declines have been a tremendous opportunity to invest more.

You make good points, but that last bit brings it back to my whole point: Elitist tycoons set up the market (or sub-markets) to 'fail', most others lose money, but they don't then they move in and buy it all up. They don't even need a Great Crash to maneuver such scenarios.

As I said, infrastructure of exploitation.

We could go back and forth forever. Perhaps a more useful allotment of time would be weighing possible solutions or alternatives, in effort to figure if the elitists could still do such manipulation in large scale. I mean we already have to worry about other things such as colluded price fixing and such which aren't inherently a Wall Street ordeal.

[edit on 1-6-2010 by IgnoranceIsntBlisss]

May I make a suggestion? Go to your library and read about stocks and investing. Read some of the money magazines out there and really study them.Read and study the news and then look for trends and patterns. Then slowly and prudently start investing in stocks... mutual funds are a great start.

I am not an elitist...I am just an ol' country boy that went to college...yes, I worked to pay for it...my folks helped, but I worked...painting houses, part time jobs, and finally full time in a grocery store.

I started readingabout the opportunities and long term gains from investing. I took night courses on real estate, and talked to anyone I could about stocks.

My first investment was a tech stock...went belly up... lost $1000 in 6 months. I continued learning.

Next stock was Krispy Kreme, and being a little anxious and unconfident, I talked to the financial advisor at my bank...he laughed and told me to avoid KKD...but I knew a good product when I eat it. I bought on the IPO, and locked in at 35.00 a share....within a month, it was over 100.00 a share, and I sold almost all of it. When I deposited my check, I stopped and told the financial advisor Hello, he wasn't laughing then.

From that point on, and even today, i still invest in funds and stocks. I am NOT rich, but my wife and I did pretty good last year and this year, even in a sour market... we took an intial investment of about 7200.00 and turned it into 28,000.00 so far.

You can do it too. Be cautious, look for LONG TERM gains, learn everything you can.... and then do it.

As we get older, we will obviously convert to less risky ventures and we plan to retire at 62 and live at the coast on some land we bought cheap. There's nothing there but a little fishing village now, but one day.

This is the great thing about America... I am not that special, my folks grew up dirt poor, I have worked all my life, and still do... usually 10-12 hours a day as an asst.mngr of a feed/farm store. Just a regular Joe. But i did it and you can too.

reply to post by IgnoranceIsntBlisss


All investment (read: non-consumption purchases) are speculative in nature, some just carry higher degrees of risk than others. The ones that are typically classified as speculative in MSM are assets with very high risk. However, even "purchasing" a checking account is speculative in nature; it is an asset, not money, and you're assuming that you'll be able to trade claims to that asset for something of value in the future.

Originally posted by IgnoranceIsntBlisss

Originally posted by sligtlyskeptical
Look back through history. Past returns prove me out. Declines hurt those who are retired mostly. On the flip side if they stuck with stocks all the way through too retirement then they still have a bunch more money than they would have had in "safer" investments. For those who aren't retired, market declines have been a tremendous opportunity to invest more.

You make good points, but that last bit brings it back to my whole point: Elitist tycoons set up the market (or sub-markets) to 'fail', most others lose money, but they don't then they move in and buy it all up. They don't even need a Great Crash to maneuver such scenarios.

As I said, infrastructure of exploitation.

We could go back and forth forever. Perhaps a more useful allotment of time would be weighing possible solutions or alternatives, in effort to figure if the elitists could still do such manipulation in large scale. I mean we already have to worry about other things such as colluded price fixing and such which are inherently a Wall Street ordeal.

My point is that time is an equalizer. If a stock will be worth X based on their earnings, cash flows and future prospects, eventually the stock will find that price, regardless of what happens in between. The market manipulation is just noise and over long periods of time doesn't result in a much different return for a long term investor than they would have had without any manipulation.

"Speculation" to answer the previous question provides liquidity to the market. Who did someone sell Krispy Kreme to at $100 a share? Hopefully it was a speculator who thought the stock could go even higher. If speculators were not in the market, the other week when stocks dropped 1,000 points in a single day would be a slow day in the stock market. A lack of buyers and sellers would mean wild price swings in stocks until someone's price was met. Imagine trying to sell your car with only 3 buyers. Buyer 1 says he will buy it for $1000. Buyer 2 says he will buy it for $900. You think your car is worth $4000. Buyer 3 is out on vacation that day you sell your car. You only got $1000 and think you lost out. Buyer 2 turns around and the next day sells your car for $3000 to buyer 3. If speculators had been in the market, you could have sold your car for a price much closer to market value in all likelihood. Without them, the market would be a lot more wild.

The same thing applies to those who short the market. If there aren't very many people left in the market who short stocks, there won't be much to stop any market collapse. When they take profits, they are in effect buying stock slowing down any stock market plunge. If they aren't in the market, look out below because only government intervention or speculators will buy up stock.



[edit on 31-5-2010 by orionthehunter]

reply to post by IgnoranceIsntBlisss


If I understand you correctly you are asking what role speculation plays in a real economy? Or more importantly, why can it do so much damage?

Speculation is gambling in the strictest sense. There is no way around that. Without the long drawn out discussion on fiat currencies, fractional reserve lending, and on and on - I agree with you. Speculation does not create jobs outside of Wall Street or investment banks. Speculation creates no physical products we can export. Speculation, by nature alone, never lent to long term economic stability, quite the opposite.

The idea of a market where honest investors can buy shares (give money) to worth while companies with good ideas is fine. That is how our current economy is supposed to work. However, when that market starts to be infested with speculators rigging and gaming the system merely for their own profit, the whole thing starts to collapse. They are like financial arsonists if I may use Max Kaiser's phrase.

Call them elites if you want to. I prefer to think of them as mobsters to the legal economy. Instead of drugs or prostitution, they racket the stock market.

When you put money in the bank you could consider that to be a form of speculation. The bank takes your money and invests it or loans it out to others. You have an IOU from the bank and get mailed a statement showing your deposit. You have only your faith in the bank paying that IOU and faith that the FDIC will pay you if the bank doesn't. After the FDIC you may have faith that the federal government and taxpayers will pay you as long as the government can still print money. Like the stock market, banks literally create money out of thin air. You make a deposit such as $5,000. The bank gives you a deposit slip. The bank then goes and uses that money to make a loan to someone else for $100,0000. Banks are required to keep a tiny portion of capital but I believe it is a tiny percentage. That's why all the tarp bailouts and financial crisis worried government officials so much. If massive bank runs started and the FDIC ran out of cash, the government would either have to start printing trillions of dollars or declare a very long bank holiday while many national banks closed down. Where would all the money have gone? It wasn't really there to start with since it was created.

The same principal can apply to stocks. For example if you have 5 people each owning 100 shares of xyz stock worth $1, that is a total value of $500 in stock. Suddenly 5 more people want to buy some of that stock and the stock price doubles to $2 a share. One guy may have sold his 100 shares for $2 each. There is still only 500 shares of stock but now the total value on paper is $1000 now.

reply to post by orionthehunter


I think we are trying to define the difference between an honest broker who "speculates" which way a stock will go and a "speculator" who does not give a damn about anything but their profit margin.

Understood the market by nature requires speculation on part of investors. However, when big house start shorting, insuring against those losses, off booking debt, etc. is when we start to have problems.

This all started out on Wall Street with virtually no regulation. Let's say that I need money to fund a business idea. I would hire these guys to go down to Wall Street to hawk shares in my new enterprise. If I am successful, everyone shares in the profits or the equity built up in the new business.

If everybody thinks it's a good idea, they will drive the price of the shares way up, possibly beyond the real equity in the business. Stocks also pay dividends providing a return to investors for their risk.

These days, if I wanted to sell you stock in an idea, I would have to register with the SEC or limit the investors to people who are defined as sophisticated investors, who have a huge net worth. This pretty much sets the little guy out these days, because of the expense.

If you do away with the stock market, you might as well do away with capitalism. Even if there were no stock markets and businesses relied only on the banks, then a downturn in the business cycle would still effect the masses.

The only way to eliminate the bust/boom cycle is to eliminate the Fed and government subsidies to business, which create artificial stimuli to the markets. It's called Laisse Faire, or to leave the markets to themselves. With the fear of failure comes greater responsibility and less risk. Keynes (which we are operating under) economics is the opposite, where we try to keep expanding to infinity,



[edit on 31-5-2010 by ogbert]