Economics gurus, theoretical question
- Thread starter amoeba
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So is the stock market a type of pyramid scheme? that when there are no new stock buyers, it becomes a zero sum game?
: ). first good and insightful answer I have heard in this thread.
I think accumulation of wealth in an absolute sense or comfort of living sense is not a zero sum game but I agree with you that it is in a relativistic sense.
yllus
Elite Member & Lifer
- Aug 20, 2000
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To really simplify it: The stock market is a measure of the value of lots of different companies. Year over year, companies either do better or worse. While many companies sag and are killed off, on the average, value builds. The cumulative value of the stock market rises accordingly.
So, is the value of all of these companies a zero-sum game? I think it's pretty obvious that it isn't. While competitors offering similar products/services might chew up each other, there is always room for innovative new products/services and a new segment of the population it appeals to.
Maybe if the population stopped growing or stood still we'd see an end to perpetual growth. Outside of that scenario, I don't see it.
But is the value of these companies what determines stock price? Think about that question. How is stock price determined? Does one guy go "hey this company is worth this much" or is the price determined by the aggregate selling and buying of that particular stock? Is there a direct link between company performance and stock price assuming a lack of dividends?
my replies will seem a bit cryptic and perhaps a bit arrogant but please think about these things and reply to me again.
I enjoyed reading your well written response.
value of the companies suggest the stock price. but imperfect information and speculation is what causes the fluctuations above/below what a fair market value for the stock is.
suggest is not a definitive term.
The stock price is determined by how many want to sell vs how many want to buy at that particular price, period. Now, does company performance influence how many want to buy and how many want to sell? of course, but it has no direct relationship with price of stock.
I essentially repeated what you said.
So let me go back to my example.
lets say that all the people in the world have bought stock and they will only buy more stock with gains they have made in the stock market and if they lose money in the market, they will not add more. That no new money will enter the market. At that point, is the stock market a zero sum game?
If the stock market was zero sum why aren't we all living like it's the 1600s, when the stock market was first invented? There was obviously more wealth generated during then and now that the stock market goes up. Stock market is backed by corporate earnings. Corporate earnings is backed by profits. Profits is a reflection of wealth and value generated.
In the short term because of the lack of information and fluctuation of pricing it may appear like a zero sum game. However, if someone makes $100 in the stock market, someone does not lose it (stock market goes up, everyone benefits, there is no one paying the winners).
However, in the derivative markets (options, futures) when someone makes $100, someone loses $100 (the counter-party has to pay the winner). This would make it a zero sum game.
Your scenario would only be valid if the corporations generated no profits. In a pyramid scheme there is no cash flow to back up the purchases. In the stock market even if no new money enters the market, the value can still increase.
gsellis
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- Dec 4, 2003
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If the stock market were zero sum, then you are worthless and you might as well end it all.
Answer first, what are stocks? Stocks are a portion of ownership in a company. When a company sells stocks, the 'owners' are selling their company, and in turn get capital (money) for sale of that ownership. A company is a collection of physical, intellectual, and labor resources. Through those, it gains wealth. The capital from stock sales allows additional investment in new resources (or makes some folks wealthy - but remember that stock creation does not always benefit individuals directly). But normally, as goes GDP/GNP, so does go the stock "worth".
Where it gets tricky is the sheep that end up determining the trading value of stocks. There is very poor behavior there and stock 'value' may have no relationship to reality. And that non-reality can ruin companies. There are companies that make money for their owners, but the stock price does not reflect that. And there are others that the sheep love because it is cool and are just a cardboard cutout. The Dot Bomb was an example of that falling in on its own weight and it sucked some real companies making money on tangible things in with it.
Answer first, what are stocks? Stocks are a portion of ownership in a company. When a company sells stocks, the 'owners' are selling their company, and in turn get capital (money) for sale of that ownership. A company is a collection of physical, intellectual, and labor resources. Through those, it gains wealth. The capital from stock sales allows additional investment in new resources (or makes some folks wealthy - but remember that stock creation does not always benefit individuals directly). But normally, as goes GDP/GNP, so does go the stock "worth".
Where it gets tricky is the sheep that end up determining the trading value of stocks. There is very poor behavior there and stock 'value' may have no relationship to reality. And that non-reality can ruin companies. There are companies that make money for their owners, but the stock price does not reflect that. And there are others that the sheep love because it is cool and are just a cardboard cutout. The Dot Bomb was an example of that falling in on its own weight and it sucked some real companies making money on tangible things in with it.
assuming no dividends, how does corporate profits go back to the stock purchasers?
If there is nobody there to buy the stock despite corporate profits, how does the stock price go up?
If there is nobody there to buy the stock despite corporate profits, how does the stock price go up?
Does it make sense to answer a hypothetical that could never happen?
But to answer your question, stocks are valued at Bid/Ask, where the Ask is what stockholders are willing to sell at and the Bid is what people are willing to buy at. So if the buyers disappear then so does the Bid. However, the Ask still remains. What does this mean? It merely means the stock is illiquid. The stock price can go up even if there is nobody there to buy the stock because the Ask can theoretically increase.
Let's say you want to sell your house. Your asking is $500k. If there are no buyers, is your house worth $0? Can you not increase your asking to $600k?
In the case of no dividends corporate profits are inherently accumulated into the stock price. In fact, when a company issues a $5 dividend, the stock drops by that amount.
Originally posted by: gsellis
It would mean that your labor, time, and resultant wages were worthless. Life has no meaning. Your children have no meaning. Give up hope.
Not the way it works, right?
You can have all of the above without a stock market. Life would be really kind of worthless if it required a stock market to function, but I digress.
gsellis
Diamond Member
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A company, even without paying a dividend can increase in value. Normally, the stock price will reflect that. A stock is a token for a portion of that value and has worth (it is 'money'). The monkey in the wrench is that traders can incorrect assess the wrong value to that unit. The market usually corrects that in the long run, but there are always instances where it does not.
Also, profits can be wasted. The executives could go spend most the year at the Chicken Ranch with the profits. No reinvestment. That is where the board and stock holders have to gain control and fix it.
gsellis
Diamond Member
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No, the point, with or without a stock market, is that people have a value and increase the intellectual value of the group (ok, we all know exceptions). Companies trade wages to us for that. That value goes into the value of the company. So, without people, there is no value.Originally posted by: amoeba
Originally posted by: gsellis
It would mean that your labor, time, and resultant wages were worthless. Life has no meaning. Your children have no meaning. Give up hope.
Not the way it works, right?
You can have all of the above without a stock market. Life would be really kind of worthless if it required a stock market to function, but I digress.
not saying my house is worth $0, but neither would you raise it to more than $500k if there were no buyers and most likely you would come down on your price after a while. In fact that is a perfect example. Lets say I have a house, I am very profitable renting it out, but I want to move and so I have to sell the house. I price it at $500k but nobody wants to buy. Lets say I increase rent this year and I am even more profitable and I take the money and renovate the house technically increasing its value in my mind but again nobody wants to buy the house at $500k. So I lower the price until I find a buyer.
I understand with regards to bid/ask and all your other points.
and I realize that in the real world, people wouldn't hesitate to go snap up whatever stock is backed by profitable company. But If you think about the aggregate wealth of the world, at the point at which no new money can enter the market, the market is by definition a zero sum game.
Originally posted by: gsellis
No, the point, with or without a stock market, is that people have a value and increase the intellectual value of the group (ok, we all know exceptions). Companies trade wages to us for that. That value goes into the value of the company. So, without people, there is no value.Originally posted by: amoeba
Originally posted by: gsellis
It would mean that your labor, time, and resultant wages were worthless. Life has no meaning. Your children have no meaning. Give up hope.
Not the way it works, right?
You can have all of the above without a stock market. Life would be really kind of worthless if it required a stock market to function, but I digress.
But GOLD has value!!! We need to back the dollar with GOLD!@!!#@
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