I’m not sure what you mean by “in aggregate”. The aggregate price of the stock market is zero, unless somebody somewhere wants to buy. Stocks can’t be converted, they can only be sold.
He has a million dollar pebble, that’s worth one million dollars: the market has established that. What other value could it have?
Let’s say there are 3 people at the table, the final sale price of the pebble is $1m, and look at the last 3 transactions:
A pays B $250k for the pebble
C pays A $500k for the pebble
B pays C $1m for the pebble
So, at the end of these transactions A is $250k up, C is $500k up, and B is $750k down.
All that has happened is that B has brought in $750k from outside the system, and distributed it to the other participants. No wealth has been created.
But, if B genuinely feels the pebble is worth $1m (maybe it’s a magic bean), then that value was there all along, the bidding was irrelevant to that.
I’m not sure about the percentages. Based on a little bit of googling it appears quite a few people think when you buy stocks your money goes into a place called “the market”, which operates much like a bank (the money is somehow “in” the market, waiting for you to redeem it.) One of the most common google questions is, “Where does all that money go, when the stock market tanks?” (No one seems to ask, “where does it all come from, when it grows?”)
People commonly talk about the market growing because people are putting money into stocks, as if the market were a balloon that grows when you fill it up with money. The idea there can somehow be more (or less) money flowing in or out of the market at any given time, seems commonplace, from my admittedly limited observations.
Another observation: people, even financially sophisticated people, don’t seem to understand why (or agree that) stock market portfolios aren’t (shouldnt be) included as national savings.
Market appreciations come out out of “thin air” and disappear into the same way. Where else would they come from, and where else would they go?
It doesn’t really matter what something is worth. What matters is how liquid the asset is. You can have assets that on paper may be worth x dollars but if you need to convert them to cash immediately, you might only get a small fraction of that. This is probably an obvious point but it’s one of the most important functions served by exchanges like stock, commodities, futures and other markets.
Moreover, what makes something liquid versus illiquid is standardization. That was one of the problems with derivatives - and may still be for many types. I think in many cases these are still one-off types of arrangements between parties that makes them ill suited to traditional types of trading.
No. Before he had a billion dollars. Now he has a pebble worth a billion. His net worth is the same as it was before.
Well, I haven’t actually said nothing like the in this thread. Though it is true I happen to believe it, it’s not the point here.
You seem to be contradicting yourself here. If someone in your family tree left money to you, isn’t that exactly the same as being it being “randomly assigned”? How could it be more random?
If money’s sitting in vaults unused, we have the means to address the problem: make more of it. We can easily replace - and put to good use - money money hoarders are hoarding. We have the technology, and no reason not to use it.
Read more carefully. I’m saying that idea is a myth, and in fact there is NO money in the stock market.
LinusK - I sort of just skimmed through the thread, but I think I’ve read enough to determine that you have no idea what you are talking about.
You talk about the stock market like it’s a place for trading tulips and Beannie Babies. Nowhere in your posts do I see any reference to what stocks actually are - shares of ownership in the corporation they represent. And corporations (at least ones traded on the NYSE or NASDAQ) do represent tangible assets. Companies like Starbucks, Arthur Daniels Midland, General Electric and McGraw Hill sell products (coffee, planted corn, shit they patent and published novels). They have vast amounts of intellectual capital. They own physical assets that have real value. IOW, there is an inherent value in owning a fraction of those assets.
Unlike your pebble hypothetical, the real value of a corporation can increase over time. A company opens more coffee shops, creates a new breed of corn, invents a new product, or publishes the next Twilight or Hunger Games saga, it becomes more valuable. Your pebble is still always the same pebble.
This may come as a shock to you, but a lot of really smart people have been analyzing the stock market for almost 200 years. Do you really think you stumbled onto some great scam?
Markets appreciate and depreciate because “stuff” appreciates and depreciates. The market is just a handy collation of all the separate valuations of “stuff”.
Take the market out of the picture and just have a barter system: you’d still have values changing a great deal as circumstances and tastes change, and you’d still have people buying sometimes purely as investments (anticipating future increases in price).
True enough, lots of smart people, but the record is less than inspiring. And it often appears to the rest of us that the only reliable bedrock certainties can only be observed in hindsight. We know exactly why what happened happened, but no idea what will. Until it does, and then its obvious.
No, he has a pebble he paid a million dollars for - but its actual worth is determined by the market. If he tries to sell it and finds that no one will pay more than $1 for it, what is his wealth? I think this is called the principle of the bigger fool - any asset you have is worth what a bigger fool can pay.
If some buys a fake Picasso for $1 million, did he break even?
I’m not following. If an investor waits to sell (realize gains) he still has to pay taxes, right? Just at a later date? What difference does that make? And why would he wait, if the amount of tax he has to pay is the same if he sells now, as if he sells later?
I’d argue that they need it to live is a good reason why their taxes shroud be lower.
Well, since the rich folks need it to create jobs, and the poor don’t have any, doesn’t leave much else.
Good for you.
Most of us don’t have your stamina or determination.
Today, the amount of tax he has to pay does depend on when he sells (see long-term vs short-term capital gains taxes). If you eliminate that distinction, you eliminate yet another incentive to “buy and hold”, thus leading to more hyper-trading.
In addition, if it is switched to income-tax-equivalent for capital gains, the investor can decide in which year he realizes the gains in order to match that to the (hopefully, lower) income of that year.
According to Warren Buffet’s thinking, the asset has “Intrinsic Value” (IV) which is something separate from “Market Value”. In the case of a painting IV can be difficult to ascertain.
But for bonds and stocks, they are the present discounted value of future cash flows, after taking into account risk. Play with the formulas a little and you get a sense of why stocks are so volatile: their IV is very sensitive to small changes in expectations of future profit growth. In fact arguably market prices should be more volatile than is commonly observed.
I don’t think your pebble parable is nonsensical: I just think it leaves a lot out. Anyway seen in this light, the stock market doesn’t create wealth per se, rather it permits a wider group of people to participate in the real wealth creation occurring in the economy.
Well, if you’re investing, you’re not just letting it sit around, are you? Isn’t letting it sit around the opposite of inventing?
Well, if inflation eats away at your money when you let it sit around, wouldn’t inflation make it that much more important to find investments that actually increase the value of what you have?
Market values determine the value of things that traded in markets. If the market value of a share of Exxon or ounce of gold or a pebble is $x, that’s its value.
It’s market economics. It’s the basis of our economic system.
YOU might not think a particular Tibetan Mastiff is worth $609,000, or that “Piss Christ” was worth whatever it sold for, but if they’re sold in an open market between a willing buyer and a willing seller, those are their market prices.
The Mastiff buyer isn’t worse off having paid for the Mastiff, he (actually she) now has a Mastiff worth $609,000.
Similarly, the pebble buyer isn’t worse off. Assuming there’s no fraud, he has a pebble worth what he paid for it.
Except people overpay for things all of the time in illiquid markets so the sale price of something is irrelevant unless it is repeated and repeated frequently.
That’s exactly wrong. No money is flowing “into” the Dow or the NASDAQ, or anything else. None of those things “contain” money. Drawers contain money. Bank contain money. Those other things don’t.
Financial wealth disappeared in the crash. Real wealth only started to fall later, when employment fell.
-
You obviously don’t read any financial publications or know anything about finance. I provided a link earlier to something called asset rotation. It would behoove you to find that and read it.
-
Wealth, in the sense of total absolute dollars is constantly being created and destroyed. I guess you’ve never heard of fractional reserve banking.