The �Stock Market� is NOT the Economy

Ignorance Alert!
Denial Needed!

I conducted a www.abovetopsecret.com..." target="_blank" class="postlink" rel="nofollow">search and could not find any discussion about the nature of the Stock Market.

There have been many threads around here lately about the economic situation:

Conditions Ripe for Recession/Depression?
United States�Third World Country
Terrorist Threat or Market Crash?
Bush killing US financially - heading for $8 trillion debt
Time to dump stocks?
Does Homeland Security have a duty to Investment Security? (Black Monday)

Here is my humble (and non-expert) attempt to explain how I understand the stock market and its role in our economy.

The stock market is not a PRIMARY market it is a SECONDARY market. Basically whenever a business �goes public� via an Initial Public Offering (IPO) it issues a bunch of shares for a fixed price.

The Underwriters buy the IPO then sell it to the broader market, but the company does not get any more money whether or not the stock price goes up. It is the brokerage houses that make the money as well as the original underwriter. For example Company X has an IPO of 1 million shares priced at $50 per share. The underwriters buy the IPO for $50 million then sell to the market. If that first day the price goes to $100 per share the company does not see a single cent of the �extra� $50 profit. They �make� $50 Million but are suddenly �worth� $100 million.

So from the company�s point of view the issuance of stock is a one-time transaction. Having their stock listed on an exchange or �INDEX� lets the �market� evaluate their performance and provides a reference for credit ratings and future stock offerings. For example some companies are said to be �worth� x-millions of dollars based on market capitalization but their assets may be significantly less. Furthermore, if the price of a stock goes up (or down) there is no change in a company�s balance sheet; the money is made by the secondary market who rely largely on speculation and forecasting. Therefore, the entire stock market is built on confidence.

Mutual funds and such would fall into a tertiary market whereby people can participate by buying a share of a broader portfolio but without owning actual stock. Derivatives are a mystery to me!

So if the stock market is simply a mechanism of valuation put in place and supported by speculators (i.e. people who hope the price will go up AND that they will eventually find another buyer/speculator) then why is it so important to follow every up and down tick on a daily basis. Oh it� up! Oh it�s down! Oh it�s up! Oh it�s down!

Bottom line is that the Stock Market is NOT the Economy!

As you can see I have a more global view than a technical one. I would like other people�s input (especially any experts who may be on ATS) into who has control (the FED, the SEC?) and how it works. And why it is so darned important when it does not represent a primary market.

Just one point on stocks is that companies can still create more shares that can be sold. I am not sure what the rules are but stock issuance is not a one time event. That is how executives become extremely rich, they get stock options or stock as bonuses etc...

The stock market creates alot of wealth and is a very important part of the economy. I am not an expert either so this is my 2 cents worth.

[edit on 2-8-2004 by cryptorsa1001]

It has always amazed me that any 10 economists will have 10 different opinions and theories. To me its all voodoo. A house of cards and a ponzi scheme as the NASDAQ meltdown showed.

Bottom line is that the Stock Market is NOT the Economy!

You're right, sorta. The Stock Market is an Integral Part of the Economy and no developed nation can do without it becuase it's a huge revenue source for the gov't. The Market is more a reflection than anything else. I will go into detail later(if somone else does not)

To me its all voodoo. A house of cards and a ponzi scheme as the NASDAQ meltdown showed.

You're entitled to your opinion but I made money on the NASDAQ melt-down its called Shorting. I shorted Nortel from mid 90s down to the 20s. Let's just say after that I took a pretty long vacation and thank god I didn't invest into anything before 9/11. That would have sucked. Smart Investors who get in AFTER crashes when the markets bottoms will always make a good profit. Investing when everyone including your Grandma has a Hot Stock Tip is foolish at best and idiotic at worst. I never got in to the Dot-Coms. Now i'm heavily into them cause the Dividends are lining my pocket

One other thing Gools, another good post But one thing I have to take issue with, and that is the Markets aren't entirely made up of speculators, there are many many types of investors. The Pump and Dumpers have really giving a bad name to the Markets in general so please dont paint us all that way please.

[edit on 2-8-2004 by sardion2000]

When companies go public they rarely 'issue' all of their shares at once.

The rest are held primarily for future capitalization, and yes some for bonus's etc.

Originally posted by sardion2000
One other thing Gools, another good post

...so please dont paint us all that way please.

Thanks for the compliment. Much appreciated.

No personal insults were intended.

I was speaking in broad strokes and generalizations.
I should have been more careful.
I too am part of a profession not held in high regard in some circles.

smirkley and cryptorsa1001

Yeah that is what I was getting at with "... and provides a reference for credit ratings and future stock offerings."

The market value of their stock is used as a basis to set the price for the next stock offering, thus providing another one-time infusion of cash. Then the market goes off and buys/sells in effect setting the price for the next one depending on how they feel the company is doing.