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> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This sel

by jseban 4y ago

> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere. And buying stocks is financing real projects, and you only get those returns if they manage to do something actually useful, this is helping to finance and promote economic activity, how is that taking money away from the "real" economy?

PretzelPirate 4y ago
If someone buys stocks from a third party in the open market, are they financing real projects? It really feels like it’s all speculation since the value of my shares doesn’t actually entitle me to that portion of the company’s profits, unless I can sell back directly to the company.
- qgin 4y ago
  The value of stocks is pinned to two events that you often don’t directly participate in but are absolutely connected to in a real way. 1. The IPO. While it’s true that only the people who buy at the IPO directly finance the company, if there wasn’t the promise of someone else in the future to sell the shares to, nobody would buy at the IPO. The existence of future second-hand buyers makes the direct funding at the IPO possible. 2. Dividends and buybacks. All stocks get their value from either the current existence or future promise of dividends and buybacks. While from time to time people get lost in “greater fool” trading, the reason a stock doesn’t go to zero is because there is either currently a dividend/buyback or people believe that eventually when the company matures, they will offer a dividend/buyback to shareholders and a future buyer will want to buy this shares for the cash returned by the company. (As a tangent, this is something most crypto investors don’t understand… cryto is almost exclusively “greater fool” trading with no basis in the promise of future real cash return)
  - MisterMower 4y ago
    Point 2 is false: shares of stock derive their value from the fact that they represent ownership in a company. If the company is profitable or owns valuable assets beyond their liabilities, then the shares themselves are valuable. Their value does not depend on current or future dividends, but on the company’s current assets and the market’s estimation of the value of the company’s future cash flows. Your point about crypto still stands: there are no future cash flows to consider with crypto, only the current value of the asset, although the comparison is really apples to oranges.
    - qgin 4y ago
      But if there is no mechanism for giving cash to the shareholder, ownership is essentially worthless (from a money perspective) except for the possibility of amassing enough ownership to take a controlling stake in the company. But even a controlling stake is just a hobby unless somehow that stake returns cash to you at some point. I agree about assets though. Book value of assets does need to be added to the value of shares, though usually that’s the smallest part of a share’s valuation.
      - MisterMower 4y ago
        You can sell stock to another person. The sale price will be higher, ceteris paribus, because the company is more valuable. This is how you make money investing in companies that don’t pay dividends. Google retained earnings for a more in depth explanation. Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. You are buying something that you hope to sell at a higher price. Investing is when you put money into something, and it gives you more money back over a period of time. Buying and selling crypto is speculation.
        jseban 4y ago
        > Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. Yeah but this reflects the fact that starting and growing a company in itself is a type of speculative activity. Any optimism about the future is a type of speculation. If you have a proven profitable business model, that you see no way to scale, there's no reason to list the company in the first place. The main reason to even list a company is to take it through a growth phase, and companies get taken off the stock exchange all the time when they don't see any forthcoming growth, because then it's only annoying for them to compromise with the power/ownership for no reason. The stock market is an accelerator for companies, not a central bank that makes absolute valuations.
- jseban 4y ago
  It's speculation on the future development of the company's performance, you aren't entitled to a share in the profit, but you often get one anyway in the form of dividends. If you buy a stock on the open market you don't actually fund starting a real project, but you fund the continuing development and improvement of that project, it's driven by the fact that they have shareholders to answer to, and you are entitled to voting rights. It has to have some amount of speculation, that's the driving force behind it, otherwise the whole thing would just stagnate and you have no incentive to improve a company and it will just get looted by its employees. In the big picture it just help collectively push for more efficient ways of working, and stop inefficient work. It's not pure speculation in the sense that you are not betting on a random event like tomorrows weather in a zero sum game.

by jseban 4y ago

PretzelPirate 4y ago

If someone buys stocks from a third party in the open market, are they financing real projects? It really feels like it’s all speculation since the value of my shares doesn’t actually entitle me to that portion of the company’s profits, unless I can sell back directly to the company.

qgin 4y ago
The value of stocks is pinned to two events that you often don’t directly participate in but are absolutely connected to in a real way. 1. The IPO. While it’s true that only the people who buy at the IPO directly finance the company, if there wasn’t the promise of someone else in the future to sell the shares to, nobody would buy at the IPO. The existence of future second-hand buyers makes the direct funding at the IPO possible. 2. Dividends and buybacks. All stocks get their value from either the current existence or future promise of dividends and buybacks. While from time to time people get lost in “greater fool” trading, the reason a stock doesn’t go to zero is because there is either currently a dividend/buyback or people believe that eventually when the company matures, they will offer a dividend/buyback to shareholders and a future buyer will want to buy this shares for the cash returned by the company. (As a tangent, this is something most crypto investors don’t understand… cryto is almost exclusively “greater fool” trading with no basis in the promise of future real cash return)
- MisterMower 4y ago
  Point 2 is false: shares of stock derive their value from the fact that they represent ownership in a company. If the company is profitable or owns valuable assets beyond their liabilities, then the shares themselves are valuable. Their value does not depend on current or future dividends, but on the company’s current assets and the market’s estimation of the value of the company’s future cash flows. Your point about crypto still stands: there are no future cash flows to consider with crypto, only the current value of the asset, although the comparison is really apples to oranges.
  - qgin 4y ago
    But if there is no mechanism for giving cash to the shareholder, ownership is essentially worthless (from a money perspective) except for the possibility of amassing enough ownership to take a controlling stake in the company. But even a controlling stake is just a hobby unless somehow that stake returns cash to you at some point. I agree about assets though. Book value of assets does need to be added to the value of shares, though usually that’s the smallest part of a share’s valuation.
    - MisterMower 4y ago
      You can sell stock to another person. The sale price will be higher, ceteris paribus, because the company is more valuable. This is how you make money investing in companies that don’t pay dividends. Google retained earnings for a more in depth explanation. Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. You are buying something that you hope to sell at a higher price. Investing is when you put money into something, and it gives you more money back over a period of time. Buying and selling crypto is speculation.
      - jseban 4y ago
        > Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. Yeah but this reflects the fact that starting and growing a company in itself is a type of speculative activity. Any optimism about the future is a type of speculation. If you have a proven profitable business model, that you see no way to scale, there's no reason to list the company in the first place. The main reason to even list a company is to take it through a growth phase, and companies get taken off the stock exchange all the time when they don't see any forthcoming growth, because then it's only annoying for them to compromise with the power/ownership for no reason. The stock market is an accelerator for companies, not a central bank that makes absolute valuations.
jseban 4y ago
It's speculation on the future development of the company's performance, you aren't entitled to a share in the profit, but you often get one anyway in the form of dividends. If you buy a stock on the open market you don't actually fund starting a real project, but you fund the continuing development and improvement of that project, it's driven by the fact that they have shareholders to answer to, and you are entitled to voting rights. It has to have some amount of speculation, that's the driving force behind it, otherwise the whole thing would just stagnate and you have no incentive to improve a company and it will just get looted by its employees. In the big picture it just help collectively push for more efficient ways of working, and stop inefficient work. It's not pure speculation in the sense that you are not betting on a random event like tomorrows weather in a zero sum game.