How is it that the stock market isnt one giant scam? I am by no means an expert, but here are my thoughts:
1) Mosts stocks don't pay dividends, and those that do don't pay very much (i.e. you'd get more in a high yield moneymarket or CD). Therefore, for an individual investor, the only reason to buy a stock is the belief that the share price will appreciate. There is NO other utility behind stock ownership (for the average investor) other than potential appreciation of shares. This is in stark contrast to other markets such as the housing market. When you buy a house you receive a place to live, and houses generally appreciate 3% per year and keep up with inflation. This is also in contrast to the baseball card market: When you buy a baseball card you receive a nice little card with a players name on it, and the value on that card depends on many factors including the rarity of the card, physical quality of the card, and the players ability.However, the baseball cards (on average) keep up with inflation. On the other hand, with stocks, we get to see little numbers on our fidelity accounts that tell us how many shares we own. And we expect those shares to grow at 10% per year! It seems stocks (like housing and baseball cards) should appreciate at the rate of inflation.
2) Stock price depends on demand. For there to be 10% average stock price appreciation yearly and assuming inflation is 3%, then there must be a 7% increase in demand yearly! How can we possibly sustain a 7% YOY growth rate in stock market demand? The world population growth rate is less than 2%! It seems to me that demand is doomed to reach a peak, and when it does, stock appreciation will level off at near inflation rates which will cause people to pull out of the market and go into fixed rate.
3) Demand for securities is being artificially increased due to the popularity of new retirement plans (401k, roth IRA, etc), the media, and the mindset that "stocks are the best bet for your money" and "10% per year over the long term" and "buy and hold"
1) Mosts stocks don't pay dividends, and those that do don't pay very much (i.e. you'd get more in a high yield moneymarket or CD). Therefore, for an individual investor, the only reason to buy a stock is the belief that the share price will appreciate. There is NO other utility behind stock ownership (for the average investor) other than potential appreciation of shares. This is in stark contrast to other markets such as the housing market. When you buy a house you receive a place to live, and houses generally appreciate 3% per year and keep up with inflation. This is also in contrast to the baseball card market: When you buy a baseball card you receive a nice little card with a players name on it, and the value on that card depends on many factors including the rarity of the card, physical quality of the card, and the players ability.However, the baseball cards (on average) keep up with inflation. On the other hand, with stocks, we get to see little numbers on our fidelity accounts that tell us how many shares we own. And we expect those shares to grow at 10% per year! It seems stocks (like housing and baseball cards) should appreciate at the rate of inflation.
2) Stock price depends on demand. For there to be 10% average stock price appreciation yearly and assuming inflation is 3%, then there must be a 7% increase in demand yearly! How can we possibly sustain a 7% YOY growth rate in stock market demand? The world population growth rate is less than 2%! It seems to me that demand is doomed to reach a peak, and when it does, stock appreciation will level off at near inflation rates which will cause people to pull out of the market and go into fixed rate.
3) Demand for securities is being artificially increased due to the popularity of new retirement plans (401k, roth IRA, etc), the media, and the mindset that "stocks are the best bet for your money" and "10% per year over the long term" and "buy and hold"
Facebook
Twitter