Do we really, truly need the stock market?

[arcane1]

I know that if it vanished tomorrow, it would create chaos, but couldn't we phase it out and do much better? Along with all the other math equations that make up the "investment" world. Does the stock market actually do anything, besides what it does for those who put money into it?

I admit, this question is based on substantial ignorance on my part, so hopefully I'll learn something :)

[ChrisBorg]

1. It generates capital for companies.

[eridani]

19. That used to be its primary finction.

Given that 70% of stock is resold within 11 seconds by compters, to what extent does it dtill fulfil this function?

[sad sally]

66. Just think of the tax revenues that could be raised if they were taxed?

The United Kingdom, Taiwan and other countries already tax securities trading. Adopting a tax similar to the 0.25 percent levy that the United Kingdom imposes on stock trades would raise more than $40 billion annually, according to a paper issued this month by the Center for Economic and Policy Research.

Co-director Dean Baker argued taxing the trading of stocks, options and credit default swaps would make it a less profitable pursuit without hurting the economy. The proposal also has a certain populist appeal.

"The tax will be borne almost entirely by the financial sector, not by ordinary investors," Mr. Baker wrote.

[WatsonT]

79. The entire financial sector is kind of surreal

I like the original concept: individuals betting their money on companies they think will succeed and companies using this to raise revenue for expansion. That gives most everyone the opportunity to invest something in the overall economy and feel like they have a stake (albeit small).

But now it's taken a weird turn where money is generated from thin air and speculation. You can make billions without producing anything based entirely on convincing people of some new trend. Basically it's built on magic so yeah it's going to fail.

I think getting rid of investment banks (or at least separating them from federally insured ones) is an absolute first step towards getting things back on track. And taxing the money makes sense too, it's an income like any other. Maybe set it such that the average person investing for himself won't be hit at all or much, but then hit those who make their living off it the same way you would tax any person making that much money.

[some guy]

23. How, specifically?

Other than an IPO, how does a company profit from the resale of shares of stock?


thanks in advance.

[4lbs]

57. Not from the resale, but by selling more shares.

Let's say I run a public traded company.

I want to re-tool a plant or finance a new product line, or just hire 2,000 people for a new project.

My bean counters tell me that it will cost me $50 million to do so.

I can either try to get a loan from the bank, a private investor (venture capitalist), or I can try to sell shares to the public.

If I get a loan, I must pay back the money at a certain interest rate. In addition, I would have to put up part of my company as collateral, which doesn't appeal to me.

Money from private investor(s) would still give them preferred shares or warrants. In the event of a company bankruptcy or liquidation, those that own preferred shares or warrants would be paid first.

I decide I want to sell shares on the open market to raise money for what I need.

I make available 5 million shares at $10 each. When those 5 million shares are bought, I got the $50 million I need.

Now, how do the shareholders profit from this?

Let's now say I am a shareholder and I purchased 100 shares, or $1000 worth of stock.

So, I can try to see if the company does well in a year, at which point the shares would be worth more, maybe double. I can then maybe sell them for $2000, and make $1000 profit.

Or, the company may issue dividends on the stock to keep them valuable. Quarterly dividends may be paid at 25 cents per share. Companies that are very profitable tend to share the wealth by doing this. To make them more valuable to shareholders and thus their stock more valuable, they may take 20% of the quarterly profit and declare dividends.

Let's say the company has 20 million shares outstanding (sold to the public or whomever). It made $25 million profit in a quarter. The board of the company decides to take 20% of that, or $5 million, and distribute as profit dividends to the shareholders of that 20 million shares. That comes out to 25 cents per share paid as a dividend.

So, I own 100 shares. That means for that quarterly dividend, I will receive in the mail (or direct deposited), $25. For a year, that's $100 paid to me, just for owning 100 shares at $10 each. I didn't really need to do anything, other than have the foresight/luck to buy shares into a profitable company. I still have the 100 shares. Which, by now, would probably be worth more than $10 per share, because the public would catch onto the fact that owning such shares would be bringing in quarterly dividends. Thus, the stock price (value) would increase from the $10 to say, $15 in a year's time. As a shareholder, I profit that way too.

That's how it used to work during the 20th Century.

[some guy]

58. Thanks. I understand all of that.

But for the most part, a company isn't issuing new stock on a regular basis. Additionally, once stock has been issued, providing dividends doesn't really help the company either.

GM has X number of shares of stock already issued. They don't make anything if I sell my shares at a profit. And if they're paying me dividends, that doesn't really help them either.

Those aspects were the point of my question.

( I do understand that if the CEO of GM has 100,000 shares of stock and that particular stock is paying dividends, it helps him/her - but doesn't really benefit GM. )

[jtuck004]

62. You are correct. In general it doesn't help them at all.

A ready market for sale of a stock allows for stock to increase and decrease based on what the public perception is.

Little to do with the company - but investors are operating from self-interest. The market exists so people can make money from other's labor. Instead of paying interest on a loan, the motivation for the investment is the profit the stockholder can make from either appreciation of the stock or from dividends (Could be selling borrowed shares and hoping they drop so they can replace them with cheaper shares too, but that's another post).

If there was no market, if there were not other people to trade these stocks with, or a "market maker" in the exchange, there would be no profit for people who take showers in the morning and live off other people's labor.

On the other hand, these people who only invest have no motivation to concern themselves with the long-term outlook. Profits can be maximized and taken out as soon as possible, labor is seen as an expense rather than an investment. Can prove to be not only bad for the company, but bad for the country when that gets out of control.

But you asked if we had to do it this way, and the answer is an unqualified no.

Without that market the workers (or someone) would have to borrow capital to create a company, (maybe from a government fund, with unbelievable interest rates like they are giving the investment banks today) and in a cooperative venture share it with the workers, as they do in companies like Springfield Remanufacturing Company. Workers are paid more, the company becomes the "market maker", and long-term survival of the company and profit can become the guide. It's not always done well, but SRC has not only helped its own workers make more money, but their long-term outlook has resulted in several benefits, among those the creation of spinoffs that create new jobs and companies.

It's a great story - workers bought a factory from Int'l Harvester that was going to close it and lay everyone off, became successful. It's not the only other way, but I have seen a lot that I like in that company as I watched it through the years.

[Art_from_Ark]

72. The Springfield Remanufacturing Company story

sounds a lot like the plot to the movie "New In Town". Or vice versa.

[jtuck004]

77. I will have to hunt that down, plot sounds a little like it.

Thank you.

No real news from your neck of the woods showing up here these days...I wonder how many people are paying attention.

[Art_from_Ark]

84. No news here recently

I have been asked by some colleagues to provide a couple of soil samples from my yard so they can subject the samples to some professional analyses. I'll probably get the results next Tuesday.

[jtuck004]

85. Sounds like people creating their own data,

not really a government effort? Will be interesting in the context of what other data might be around as well.

[Art_from_Ark]

86. Let's say that there are people who want a variety of data

Some people want completely independent data. My colleagues are eager to compile their own data set with samples taken from a variety of areas that lie roughly along a line from Fukushima Dai-ichi to Tokyo.

[melm00se]

73. that is true that they

don't issue new stock (for the most part) but companies rarely sell 100% of their shares they hold back a certain amount (how much is dependent upon their business plan and ownership strategy).

companies can sell those shares (or, conversely, buy them back) under certain economic conditions.

[ipfilter]

78. This may help.

http://en.wikipedia.org/wiki/Capital_structure

Stocks are but one of many ways corporations raise capital. Stocks are the equity but corporations who attempt to grow almost certainly have a large ratio of debt through bonds. Stock holders, while in theory have the rights to a share of profits through appreciation or dividends, are the lowest tier in the capital structure since they are the mostly likely to lose 100% of their investment in the event of a corporate bankruptcy.

You have to think in terms of equity vs. debt. Stocks are the equity and are simply worth whatever the public thinks they are worth at any given moment. The balance sheet is affected by the share price because it is equity and directly affects the ratio of value as it relates to debt, liabilities, and assets.

Stocks are a zit on the arse of the bond market. They are the tail that wags the dog.

[Terry in Austin]

41. Misconception

Perhaps 5% goes to that purpose. The rest is trading of already-existing stock.

[ChrisBorg]

45. There is no "already-existing stocks" when the company goes public.

All of the initial offering money goes to capital.

[Terry in Austin]

51. Yes - the aformentioned five percent -nt

[Fool Count]

75. Yes, there is. IPO usually offers only a small fraction of

outstanding shares. The rest remain held by the same shareholders who owned them
when the company was private. A privately held company can also raise capital by
selling its shares, it's just don't do it on the stock market. The main purpose
of the stock market is to provide liquidity for shareholders. They would argue that
it's the liquidity provided by the stock market that makes investments in stocks
attractive to retail investors thus increasing the total pool of capital. But
that is doubtful, without stock market small investors would just keep their
money in the bank and the bank would then invest it in stocks of private companies,
among other things, leaving the total pool of capital unchanged. More cynical view
is that the stock market exists for the sole purpose of fleecing individual small
investors who are inevitably more gullible and prone to being swindled than big
players involved in private investing.

[virgogal]

2. Commodoties trading is the one I don't get. Maybe we will both learn something.

[Johonny]

13. It makes sense for the consumer and the producer

why people that have no earthly need for the commodity are allow to basically bet on it seems odd and not always very productive.

So if you say make corn flakes I can see why you want a commodities market for say corn is helpful to you. For me I see no earthly reason why I can buy so much corn. WTF would I actually do with it if I got stuck with it :) Although some economist show some speculation can help the producer and consumer and those can be helpful to the market.

[PoliticAverse]

25. The purpose of commodities (futures) markets is to provide price-insurance to producers/consumers

of a commodity. It allows them to lock in the price of things they produce or will need in the future.
Agricultural commodity markets in a sense provide weather insurance.

[onehandle]

3. Yes, but it needs to be taken offline.

In the old days, people invested in stock. Companies actually developed and built things.

Now the majority of the stock market 'investors' are douchebags buying and selling in seconds based on nothing.

It should go back to the old way. You got certificates and after a reasonable amount of time, you made money. Or not.

[onenote]

4. stocks are held for shorter periods, but the "seconds" meme has been debunked.

The average length of time that stocks are held is months, not weeks, days, hours, or seconds.

[onehandle]

18. Based on nothing. Run by douchebags.

I stand by those.

[RaleighNCDUer]

26. I just debunked your debunking.

The average length of time that stocks are held is seconds, not hours, days, weeks or months.

See how that works?

Considering how many stocks are supported with 401k investments - which tend to be long term - the actual trading time in the market is absurdly short. Day traders, playing the market, on-line wannabe stock investors, all make for ridiculously short trade times, and then there's the computer trades which automatically buy and sell when a stock hits a certain number, and if that number bounces up and down the trades bounce with them. If you have, say, 500 shares held by one person for 25 years, and you have another 500 shares being traded every 4.3 seconds, what's the 'average' lenght of time those stocks are held?

The volitility in the market in the modern style of trade undermines any real investment value of the stock for the company.

[provis99]

29. link?

No response, eh. I will assume you are just making shit up then.

[muriel_volestrangler]

37. There are 2 (or more) measures that people may be talking about

which may actually enable everyone to be 'right'.

If the average of length of ownership of all shares is taken, then it will be high. For instance, the NYSE claims that highest ever annual turnover of shares was back in 1901, when it was 319% - so the average time of ownership was a bit under 4 months. Turnover increased from 13% in 1962 to 78% in 1999. Turnover may have increased a lot since then, and thus average time of ownership decreased, but not enough for that to go down to seconds.

However, the average length of ownership of each share that is traded may be very small. There will be some shares that get traded extremely frequently, and some that are held for years. So the length of ownership of each share sold will be a lot shorter, on average, than of each share in issue.

The '11 seconds' figure seems to have been an estimate of the average length of time that high frequency traders hold on to shares ("I know of one HFT firm operated out of the west coast of the US that boasts its average holding period for US equities is 11 seconds"); and they are estimated to make up over half the trading on US markets. The median time that a traded share has been held before being traded again may well be under a minute.

[provis99]

28. link?

[onenote]

76. link debunking the "seconds" myth

http://www.ritholtz.com/blog/2010/10/average-stock-holding-period-11-seconds/

[unkachuck]

5. no....

....if our government would tax the affluent properly, it wouldn't have to beg for money and could distribute our resources through a fair federal banking system....

....ditch the greedsters, banksters, casino bosses and speculators and free the people from this corporate tyranny....

[Jack Sprat]

10. +1,000,000 ya ba da ba doo.

[October]

65. +1 - oh the speculators in this country!!! UGH!!!

/nt

[nadinbrzezinski]

6. Yes, BUT it needs to be regulated, heavily regulated

the function of the stock market is simple, but complex at the same time. It's role is to raise money from private individuals to invest in companies. Think of these capital investments as micro loans to saith companies. No, I don't care how rich you are... but a billion plus is not an easily raised amount... even 500 million, average IPO.

The problem is that the regulations that kept it in check and doing what it is supposed to do have gone, and these days it is also used for other things, like leverage stocks...

That shit needs to stop. Of course that also means that dividends will go down... why the ones at the top fight that.

[arcane1]

11. Now I could see that being a useful thing, up to a point

perhaps if there was a specific expiration date or something.

But I doubt that Chevron and GE really need to rely on "investors" in order to help them grow, with all the profit they are making. And "growth" cannot continue indefinitely for any company, so the growth turns into cost-cutting and layoffs/outsourcing.

Maybe if stocks were more like bonds, they would work better as intended..? Then again, I no little about bonds either :shrug:

[nadinbrzezinski]

14. Actually Chevron relies on investors

Part of their working capital, a large part, is investor based. Which is also part of the problem. They need to answer, by law mind you, to the only thing that matters to the investor, Return on Investment... why they will do anything to improve profit. And yes, all them pesky regulations get in the way.

So does GE, by the way.

They are publicly traded companies.

Now the problem with these two companies is not that they are traded in the exchange, but rather the size of these two behemoths, and they should be broken down, as at this point we have entered the area of a monopoly that controls a sector of the economy through economies of scale. No, not me saying that... actually would be VERY CAPITALIST to do such. Adam Smith abhorred monopolies (which were a problem under the mercantilistic system of his age. see the East India Company that controlled all trade to the American Colonies, under Royal fiat)...

As to bonds, they are a type of stock very technically speaking.

The problems with the US economy and yes the stock exchange, is that we are no longer functioning in a capitalist economy and the exchange is as free for all as it's been since oh 1929... and we know how that party ended. The stock exchange works best actually when it deals with small to medium sized companies and behemoths, aka monopolies, are not allowed to rise... that means regulations. Oh and Adam Smith had a three page warning on that famous hand of the market place... after he mentioned it ONCE. I love to show that to free market fans who dare go there in my presence.

[A HERETIC I AM]

22. Bonds are BY NO MEANS "a type of stock" technically or otherwise.

A bond represents debt.

A share of stock represents ownership. Stock comes with it voting privileges. Bonds have no such privileges.

Most bonds have a set maturity date - that day on which the loan amount is repaid.

Stock has no such date.

Most bonds pay regular (typically every 6 months) interest payments and depending on the original issuance terms, MUST pay these payments or they are in default.

Stock has no such requirement, though some do pay dividends, there is no requirement to do so and a company can stop and start dividend payments any time.

Suggesting stocks and bonds are "technically" the same is incorrect.

[nadinbrzezinski]

24. Ok stand corrected,

regardless we are no longer living in what Adam Smith defined as capitalism...

And that IS part of the problem

[Sgent]

54. Although

interestingly they are part of the capital structure of a corporation -- this is explicitly seen in banks where they even call it Tier 1 capital, Tier 2, etc; however, finance theory considers bonds and stock to be very similar in that they raise outside money for a corporation.

One of the reasons our companies are so highly leveraged for instance is the tax treatment of bonds -- in other countries bonds make up much less of the capital structure. Because interest payments are tax deductible, whereas dividends are not, companies are incentivized to issue bonds over stock.

[Blue_Tires]

36. +1

It needs a lot more transparency and checks to stop people from gaming the system (imho, those are the only people who ever really make money with it, anyways)

[Jack Sprat]

7. We need to extricate all retirement funds from it

They hold those hostage and the lives of older Americans dependant on them too.

What does it do? It creates all sorts of speculation driving up prices of commodities for one. It allows people with extra money to make money off the labor of others. It creates confusing financial instruments, like CDS (credit default swaps) to swindle unaware governments (local, state, and national) out of their financial solvency. I'm sure some others could offer up more things it does.

[spin]

8. I'm far from rich but if I didn't have a 401(k) and an IRA ...

I would have to live on a small pension and social security. My 401 is invested in stocks and while it has had ups and downs, it has grown over the years and has made my retirement easier and more enjoyable.

[Hugabear]

15. Your retirement should not have to be dependent upon the whims and fortunes of corporations

That's what makes this so fucked up.

[dmallind]

21. but why should he not have the choice to invest in them? nt

[melm00se]

74. quick question

where do you think the bulk of pension funds are?

[RaleighNCDUer]

30. What went into your 401k should have gone into a real pension with

defined benefits - then you would not be dependent on a "small pension" and SS.

A few people are lucky. A very few know what they are doing with investments in their 401k. The vast majority have only a vague understanding, and most have seen their 401ks devastated twice in the last 10 years. And then there are those - more than half the working population - who don't have 401ks OR pensions.

Just because you may have been lucky, don't assume the system actually works.

[muriel_volestrangler]

39. How do you set up a 'real' pension?

You need some form of investment that is not controlled by the company you work for (the company may go bust, or dishonest directors may take the money that was meant to be put aside for paying future pensions). Defined benefits are nice, but someone still has to invest the money to be able to pay those defined benefits. If you don't invest in shares that pay dividends and increase in sale value, then you need to lend the money to someone (ie bonds) or buy physical assets that produce an income and appreciate in value (ie property). But it seems strange to exclude one form of investment - stocks - from pensions.

Or you make all retirement income part of Social Security, where the government pays it, and it's up to elected politicians to decide how to fund it. But I think you aren't advocating that, because you didn't want people dependent on SS.

[Terry in Austin]

46. Yer classic pension is basically an annuity

Makes it more of an actuarial proposition than a rent-seeking one.

With insurance, management of risk to the underlying fund is built into the deal. With equity and lending, you take your own chances.

[Tuesday Afternoon]

9. not necessarily. human kind got along without one for many years.

I tend to live outside the box, though.

[nadinbrzezinski]

16. The earliest form of a stock exchange

was probably in Greece... that has been a long time indeed.

The first identifiable exchange in modern terms rose in the 13th century.

The first stock exchange we could call such properly came in the 15th...

So I would not go that far.

And you think insurance is a modern invention too? Again Athens had a healthy exchange of that in the fifth century bce

[Tuesday Afternoon]

31. human kind was here a lot longer than that . . .

but, whatever. I am NOT a fan of the stock market, especially in its current manifestation.

The American Indian seemed to do very well without a stock market. Would you say that they are Lesser civilizations because they had NO stock market. If so, I would beg to differ. Perhaps you define civilization differently from I.

and look at Greece now, btw.

[nadinbrzezinski]

32. Well if you are going to look at the whole of human history

Before the rise of agriculture and writing. And please do avoid putting words into my mouth.

I suspect a stock exchange is a function of more complex systems, not more advanced or less advanced civilizations.

And while the American Indian did not, as far as we know, the Aztecs and Maya had a form of insurance and probably something akin to investments in the teocallis.

And yes as far as we know...some of the cultures, like the mississipi basin, probably did. Again a more complex system.

[Tuesday Afternoon]

34. you suspect...?

and trust me ... I never put words in your mouth. All I did was take YOUR words out of MY mouth.

I replied to the OP.

take your condescension elsewhere, no buyers here, thanks.

[nadinbrzezinski]

35. Yes I suspect, with a bunch of archeologists

both the anazasi and the Mississippi basin cultures were advanced enough to lead to the theory that like any other culture at that level of development of complexity, would develop something like commercial institutions, including something like INSURANCE and a stock exchange, Would they look like NYSE? That be silly.

And yes you did put words in my mouth... but have a good life, that is what the iggy list is for...

[Tuesday Afternoon]

52. you replied to me

I was not even talking to you. and NO I did not put words in your mouth. and from what I understand, I am in good company if I made your somewhat notorious iggy list. ciao.

[Boojatta]

55. "and look at Greece now, btw."

Isn't that like hitting below the belt?

[Tuesday Afternoon]

56. lol

thanks, I needed that :D

[WatsonT]

80. That could be said of the internet as well

or cities for that matter.

[cbdo2007]

12. Oh good, this again.

I love hearing from the financial geniuses here at DU! *sarcasm*

[unblock]

17. well, the PRIMARY market yes, but most trading is in the SECONDARY market

the primary equity market is the initial public offering, when a company issues new or additional stock to actually raise funds in exchange for a portion of ownership in the company. that is a very essential function. without it, companies would have to rely on private contacts, which is not only very inefficient, but quite unfair as well. mere mortals would never even hear about grest opportunities.

now, the primary market could function somewhat is investors were stuck with their equity ownership for a long period of time, but the primary market works FAR better if there's also a SECONDARY market where investors can trade amongst themselves. investors are far more likely to buy up initial public offerings, and pay more for them, if they know they can cash out their investment at any time at a then-fair price.

so, while the secondary market in and of itself may not appear to be of great use, its mere presence greatly enhances the functioning of the PRIMARY market, and therefore is very essential as well. giving liquidity to stocks is of great value to investors and to companies alike.



now, the question is, what excesses in the secondary market can be reasonably curtailed while still preserving its utility to the primary market? for instance, is it really necessary to be able to execute a trade on a microsecond's notice? is it really necessary to have markets open virtually round the clock? would it really be a problem if all trades happened twice a day, or once an hour, etc.?

at some point, it's not clear that the greater "advances" in the stock market have really produced further economic benefit in terms of value to the primary market.

[AndyTiedye]

20. It is More Transparent Than a System Where Stock is Not Publicly Traded

If there were no stock market, investors would have to negotiate with the owners to buy a stake in a company.
Subsequently if they wanted to sell their stake, they would have to hunt around for a buyer.

That is the case today, with companies that are privately-held, i.e. their stock is not traded on any exchange.

Such transactions are largely unregulated, compared to sales on a stock exchange.

Stock markets are paragons of conservatism compared to what banks have been allowed to do lately.

Along with all the other math equations that make up the "investment" world.

What are we supposed to do with our money? Or aren't we supposed to have any money?

[Name removed]

27. Deleted message

Sub-thread removed by moderator. Click here to review the message board rules.

[Cleita]

33. I would call it a parasitical sector of the economy like

insurance. I might say we need neither. I would rather we replaced insurance with non-profit disaster funds, maybe run by a non-partisan branch of the government that would act as trustee, that we pay into and that we can put a claim on if we need it. I would only allow the private sector insurers like Lloyd's of London, for instance, to insure for really high risk ventures that they can charge high prices for. As far as the stock market, I think it should be made illegal as anything but a casino, which is what it is. It should not get any government funding or bail out if it fails. If people want to gamble, that's their problem but it should not be part of our economy in any way whatsoever.

[NeedleCast]

38. Do we really, really need automobiles?

[Terry in Austin]

42. No.

Not any more than we "need" WalMart or suburbs.

This would segue nicely into the discussion about what we really "need." I'd say it's not nearly as much as we think.

[MemeSmith]

40. It's called price discovery

It's a process of finding out the true functional price of a financial instrument, be it a share of a company, a bond of debt, or a quantity of a commodity.

These items being priced too cheaply is as harmful as them being priced to highly.

For instance, if oil were to be priced too cheaply, the companies that produce it would go out of business and the consumer would be out of supplies. Of course, as one company failed, the lack of supply would drive up price to compensate, but that's a bit late for the people who can't fill their tanks and the others who can't put food on their children's plates, because their jobs at the drilling rig just went south.

The financial markets provide stability in those dealings, by deriving, in the absence of bubbles, the true price of any instrument, relatively quickly. Only trading can do this. The price is almost always wrong, either too high or too low, but only trading can bring it back. In this way, where price discovery is a desirable function of the markets, eleven second trades are the public's best friend. Don't forget, for every speculator who is winning on an eleven second trade, there is another who is losing by an equal amount.

Where bubbles are concerned, mania drives the price to unreasonable extremes, fuelled by an abundance of cash, greed and stupidity. Bubbles always burst, however and true value re-asserts itself.

The current financial crisis was not caused by a free stock or financial market. In a free market, the irresponsible banks would have gone bankrupt and the government could have rescued the financial system by buying their material assets for a peppercorn sum, using emergency legislation, justified by the magnitude of the crisis. The 'bank' today, after all, is the tax payer.

In this way, the executives who were 'owed' ludicrous payouts from companies that they had ruined would have been 'owed' that money by bankrupt businesses, and therefore recieved what they were truly due, nothing.

[Shagbark Hickory]

44. Was oil really the best example you could think of?

When I think of stability, oil does not come to mind.

[MemeSmith]

68. Oil is an example that people outside of the market can relate to

Its instability is also illustrative of both the distortions that can occur and the eventual corrections that trading brings.

High oil prices are not caused by speculators. Speculators do not give a rats anus about whether the price of a traded instrument is high or low, merely whether it is likely to move. Indeed, in a recent case of market manipulation, the parties were found guilty of trying do drive the price of oil down, while shorting the market.

The price of oil was driven to recent heights by the market anticipating real demand at the point of use, particularly through activity in the domestic Chinese market, compared to progressively restricted supply, as oil producing nations are increasingly caught overstating their accessible reserves. The price goes too high, when the speculators overestimate the demand and are caught owning a commodity that cannot be sold for what they paid for it.

If the price doesn't fall, it isn't a bubble and that's the real price, because we're compteting with people all over the world for the things that we want. Much of this is driven by the companies that moved our manufacturing capacity to China and placed the Chinese in the driving seat when competing for the world's supplies of commodities.

[Shagbark Hickory]

81. Very thoroughly explained. Thank you!

[Terry in Austin]

48. That's what those in the game call it, anyway

Just like certain manipulations of a horsehide-covered ball are called "forced outs" or "sacrifice flies."

The relevance is limited. It's just lingo, some of which may apply to the real world (and some not).

But then, we already know that those in the game aren't the people to consult if the question is whether we need their game or not.

[MemeSmith]

69. There are two ways to find out for sure whether we need the game

We can either try living without the game, or we can examine the history of those countries or societies who have tried in the past to live without the game.

To misquote Churchill, it's the worst system, with the exception of all of the others.

For sure, firm, real and uncorrupted regulation is vital, particularly in a banking system that is allowed to invent money out of thin air, thereby producing a swill of cash that is looking for a return and inflating bubbles wherever it lands.

On the plus side, as a European resident, I can say that the US has the best markets, in terms of openness and transparency, as flawed as they are. I would not trade the FTSE. At least, in the US, if you participate as an online individual trader, you are in the same market, with the same access, the same risks and the same potential rewards as all of the major institutions.




Edit, to get my Churchill the right way round, so it wouldn't be nonsense.

[Rex]

43. I don't, but then again I actually work for the money I earn.

So you could say Wall Street doesn't really need me.

[Terry in Austin]

50. "Earning" is a very political relationship, isn't it?

In fundamental terms, it's a power relationship -- someone with the power to say so has decided that the acts of work you have performed at their demand have enough merit to bestow money in recognition of those acts.

Oh yeah -- they're the ones who get to define what "merit" is. It can be pretty arbitrary.

[ThomWV]

47. Hell yes we need it.

Only people who have no clue what the market is and what it does actually consider abolishing it. The best thing to do to understand the market is to ignore those who think the thefts that take place by the "Wall Street Bankers" has anything at all to do with the legitimate stock market. They do not. The stock market is not a 'turkey shoot' and its not a 'horse race' either. Its a place where any individual can by shares in any listed company - really, that's all it is. And if you chose wisely - which is not too difficult to do - it is a place where you can build wealth. Wealth, it seems, is another concept that has been lost on most of us. Savings is not wealth, it produces nothing. Wealth is the ownership of the means of production and unless you are financially able to start your own business or have one given to you the stock market offers the easiest route to fractional ownership of existing companies.

Of course the stock market (there are many) is a secondary market. No company sells its stock directly on the Market. Initial sales are done by other means but once the shares are in the hands of private owners they may be bought and sold just like any other valuable possession. The Stock Markets simply offer a place and mechanism by which the trades/sales can be made. And that is what makes the Markets so important. You see, if there was no place and way to conveniently sell stocks, if they had little liquidity, then they would be hard for companies to sell in the first place. But because the secondary market exists investors know that they can sell their shares with a simply phone call or a few keystrokes and that liquidity could not exist without the organized Stock Markets. So without the Markets companies would have much more difficulty making the original sale of new shares in order to raise money for capital expansion. And that is why we need them.

[Terry in Austin]

49. Building wealth

>> Wealth is the ownership of the means of production

Sorry, that misconception lies at the heart of capitalism and accounts for much of its toxicity, IMO.

"Ownership" is an abstraction that's almost as far away from material wealth as "money" is. It's basically an excuse for rent-seeking.

[originalpckelly]

53. The problem is that they want to own other people's wealth.

They have to do this because we do not have a currency with stable value. It's like going to build a house, but the feet you use today are worth 13 inches tomorrow. This is a false input into the market and in part allows bubbles to form.

[ThomWV]

87. Balderdash

I have not seen tripe like that in a very long time.

""Ownership" is an abstraction that's almost as far away from material wealth as "money" is. It's basically an excuse for rent-seeking."

OK, I'll bite, if "Ownership" is just an excuse for "rent-seeking" and has nothing to do with wealth maybe you would be good enough to tell us all just what 'wealth' actually is. Your wisdom is sought.

[Incitatus]

59. Yes, more regulation on how stocks are traded and how capital gains are taxed is whats needed. nt

[SDuderstadt]

60. I agree:..

on the tax side, I agree that capital gains should be taxed somewhat lower to spur investment, nut 15% is way too low.

[Incitatus]

64. naked short selling is something that should definitely be addressed

I don't have a problem with margin accounts or options. I don't know a great deal about the specifics electronic trading, but I suspect that there is some shady activity going on with the big brokers. I don't have a problem with buying a stock online and selling it the same day for a profit. Anyone using information and systems not available to the public to game the market, that's a problem.

[Selatius]

70. Short-selling isn't the problem, it helps provide liquidity to the market.

The problem is the sell of complex financial instruments that are poorly understood, and that people who push those instruments know that they are poorly understood and use that ignorance for gain, while the rest of the economy absorbs the poison or is forced to clean up the mess that comes.

[Incitatus]

71. There is a difference between short selling and naked short selling. nt

[RoryK]

61. No, you do not.

Nor does any nation benefit from a centralised "bank."

[PassingFair]

63. No, it's become nothing but a casino. Complete with the guaranteed pay-off for the "house"...

[moondust]

67. Doing away with it

would probably only help Main Street, possibly even reverse some of the damage corporations have done to small business over the past 30+ years.

IMO stock markets create too much incentive for corporations to do ANYTHING UNDER THE SUN to grow their profits and drive up their stock price (so that the CEO and a few others can become obscenely wealthy), including offshoring and automating/computerizing jobs, blowing the tops off mountains, fouling the environment, cutting down old forests, etc. And the people who profit the most from those practices usually don't suffer the adverse consequences as they are comfortably tucked away in their estates and gated communities and McMansions.

[JackRiddler]

82. Of course not but in the US that's like asking, do we really truly need faith in the Sky God?

[fascisthunter]

83. hmmmm... good question