4 ms·

You mean stocks should be banned? Conceptyally they are kind of the same thing.

by rvba 4y ago

chordalkeyboard 4y ago
conceptually they are different. stocks are equity and bonds are debt.
- ghaff 4y ago
  If you dig into finance theory they're not as different as you might think. And it gets even fuzzier when you consider instruments like convertible bonds.
  - chordalkeyboard 4y ago
    if they weren't different then why would the bond need to be converted from one to the other?
    - ghaff 4y ago
      I wrote they weren't as different as you might think in terms of who has claims on the company etc. At the practical level there are obviously differences between different classes of stock, callable vs. not callable bonds, convertible bonds etc. I'm just saying that equity vs. debt is not binary.
- rvba 4y ago
  Stocks are equity that (at least in theory) allows you to have perpetual dividends. Of course most companies fail in longer time frame, also modern stocks are kind of a modern concept, but there are some really old companies here and there. Most dont pay dividends but conceptually they could. Also in 100 years people will probably still drink wine/beer, eat salt or will want to go to some respected restaurant or a traditional hotel near a japanese wellspring. https://en.wikipedia.org/wiki/List_of_oldest_companies https://en.wikipedia.org/wiki/List_of_oldest_companies
  - mdasen 4y ago
    There's a huge difference though in that the bond comes with a fixed payments while the stock's dividends can be varied or eliminated entirely depending on what management thinks is prudent. The bond creates an obligation to pay to a third party. The stock creates no obligation and the management/owners of the company can decide that it is worthwhile to pay the owners a dividend. If I lend you $100,000 to open a restaurant and the restaurant is barely scraping by, you still owe the money. If I invest $100,000 in your restaurant, I have an ownership stake in the restaurant, but if there aren't any profits there won't be money coming my way. Yes, if the restaurant completely fails, maybe I'll lose the lent money, but I will get paid before owners. Likewise, if the restaurant is making $10,000/year before my loan is paid and it's a 10% interest loan, I get to take that $10,000/year interest owed me. Stock is just giving someone a claim to a percentage of the business. Bonds are giving someone a claim to a certain amount of money. There's a huge difference. Bonds need to be paid even if the business is doing poorly (unless you want the business to declare bankruptcy). Stock doesn't need to be paid, but of course the stockholders get to share in the success of the company if it happens while bondholders don't. There are convertible bonds where someone will give you money at a lower interest rate in exchange for the ability to convert the bond's value into equity if the company does well. For example, instead of a loan at 10%, I offer you a loan at 3%. Your stock is currently $20/share. If the stock hits $50/share or higher, I can convert the bond's value into stock at $50/share. I loan you $100,000 and the stock hits $100/share and so I convert that $100,000 bond into 2,000 shares which is worth $200,000. As the lender, it's low risk - I might lose some interest if the company doesn't do well, but it's still a bond; if the company does really great, I can share in the gains (though not as much gains as if I'd just invested the money since the price was $50/share instead of the $20/share I'd have paid had I just bought the stock). As a borrower, it means not having to worry about servicing debt at high interest rates (which can really hurt the company) and if the company is doing so well that the stock is soaring that much, the slight bit of watering down of investors isn't really important. But that's a tangent. Stocks and bonds are really different in terms of the obligation. Bonds/debt can destroy your company if you end up having to use all your revenue servicing that debt. Issuing stock doesn't come with that risk for the company.
    - 4y ago
Ericson2314 4y ago
Yes, they should be. Bonds-only is a great system. There is far too much inertia/permenance in development currently. Lot's of empiracle research like https://cepr.org/voxeu/columns/missionaries-human-capital-transmission-and-economic-persistence-south-america https://cepr.org/voxeu/columns/missionaries-human-capital-tr... on this. This is a design flaw. We should design economic systems that have less permanent state to remedy this.
- rvba 4y ago
  So who should own the means od production? Vladimir Lenin?
  - Ericson2314 4y ago
    Things don't need to be owned! Which do you like better --- worker-controlled coops or state/everyone-controlled companies? I am fine with either or an interpolation between them. This isn't some hippy-dippy thing, there would be a robust and healthy bond market to capitalize these institutions.

You mean stocks should be banned? Conceptyally they are kind of the same thing.

by rvba 4y ago

You mean stocks should be banned? Conceptyally they are kind of the same thing.

chordalkeyboard 4y ago

conceptually they are different. stocks are equity and bonds are debt.

ghaff 4y ago
If you dig into finance theory they're not as different as you might think. And it gets even fuzzier when you consider instruments like convertible bonds.
- chordalkeyboard 4y ago
  if they weren't different then why would the bond need to be converted from one to the other?
  - ghaff 4y ago
    I wrote they weren't as different as you might think in terms of who has claims on the company etc. At the practical level there are obviously differences between different classes of stock, callable vs. not callable bonds, convertible bonds etc. I'm just saying that equity vs. debt is not binary.
rvba 4y ago
Stocks are equity that (at least in theory) allows you to have perpetual dividends. Of course most companies fail in longer time frame, also modern stocks are kind of a modern concept, but there are some really old companies here and there. Most dont pay dividends but conceptually they could. Also in 100 years people will probably still drink wine/beer, eat salt or will want to go to some respected restaurant or a traditional hotel near a japanese wellspring. https://en.wikipedia.org/wiki/List_of_oldest_companies https://en.wikipedia.org/wiki/List_of_oldest_companies
- mdasen 4y ago
  There's a huge difference though in that the bond comes with a fixed payments while the stock's dividends can be varied or eliminated entirely depending on what management thinks is prudent. The bond creates an obligation to pay to a third party. The stock creates no obligation and the management/owners of the company can decide that it is worthwhile to pay the owners a dividend. If I lend you $100,000 to open a restaurant and the restaurant is barely scraping by, you still owe the money. If I invest $100,000 in your restaurant, I have an ownership stake in the restaurant, but if there aren't any profits there won't be money coming my way. Yes, if the restaurant completely fails, maybe I'll lose the lent money, but I will get paid before owners. Likewise, if the restaurant is making $10,000/year before my loan is paid and it's a 10% interest loan, I get to take that $10,000/year interest owed me. Stock is just giving someone a claim to a percentage of the business. Bonds are giving someone a claim to a certain amount of money. There's a huge difference. Bonds need to be paid even if the business is doing poorly (unless you want the business to declare bankruptcy). Stock doesn't need to be paid, but of course the stockholders get to share in the success of the company if it happens while bondholders don't. There are convertible bonds where someone will give you money at a lower interest rate in exchange for the ability to convert the bond's value into equity if the company does well. For example, instead of a loan at 10%, I offer you a loan at 3%. Your stock is currently $20/share. If the stock hits $50/share or higher, I can convert the bond's value into stock at $50/share. I loan you $100,000 and the stock hits $100/share and so I convert that $100,000 bond into 2,000 shares which is worth $200,000. As the lender, it's low risk - I might lose some interest if the company doesn't do well, but it's still a bond; if the company does really great, I can share in the gains (though not as much gains as if I'd just invested the money since the price was $50/share instead of the $20/share I'd have paid had I just bought the stock). As a borrower, it means not having to worry about servicing debt at high interest rates (which can really hurt the company) and if the company is doing so well that the stock is soaring that much, the slight bit of watering down of investors isn't really important. But that's a tangent. Stocks and bonds are really different in terms of the obligation. Bonds/debt can destroy your company if you end up having to use all your revenue servicing that debt. Issuing stock doesn't come with that risk for the company.
  - 4y ago

Ericson2314 4y ago

Yes, they should be. Bonds-only is a great system. There is far too much inertia/permenance in development currently. Lot's of empiracle research like https://cepr.org/voxeu/columns/missionaries-human-capital-transmission-and-economic-persistence-south-america https://cepr.org/voxeu/columns/missionaries-human-capital-tr... on this. This is a design flaw. We should design economic systems that have less permanent state to remedy this.

rvba 4y ago
So who should own the means od production? Vladimir Lenin?
- Ericson2314 4y ago
  Things don't need to be owned! Which do you like better --- worker-controlled coops or state/everyone-controlled companies? I am fine with either or an interpolation between them. This isn't some hippy-dippy thing, there would be a robust and healthy bond market to capitalize these institutions.