The OP seems to be concerned with speculators and day traders as opposed to stockbrokers. The benefits of speculation is that they smooth price changes which gives people time to adjust to the price changes. For example if there is an earning report on how a company is doing due on December 1st. Speculators try to gather information on the company and if they think the company will be do well in the report they start buying stock in the company in November. The price of the company edges up every week and then when the positive report comes out the price has a small bump. If speculation was not taking place when the report came out the price would suddenly jump up. Huge spikes and drops in stock prices are not good for the market as a whole. Speculators are always the whipping boys of executives whose companies are doing poorly, but they provide a useful service to the market and the market provides a useful service to society.
An example of a market without speculators is the onion market. Futures in onions were outlawed in response to an attempt to corner the market. Onion prices are significantly more volatile than those for other vegetables, hurting both buyers and sellers of onions who can not plan as well as they otherwise would be able to.
The recent unpleasantness with CDOs and mortgages which has so many angry at Wall Street had almost nothing to do with stocks and involved bonds, which is where the money really is.
I think the earnings that are made in the stock market can only be justified if the stock market actually contributes anything in return. Lots of things can easily be justified without a benefit to society, but if traders spend money earned in the market and don’t contribute to society in doing those trades, they are effectively free-riding. And if that’s the case, with the money they make, they are heavy duty free-riders in a world that’s already got too many problems.
BUT - I started this thread because I’m open to the possibility that trading in stock is actually beneficial to society. I’m still not convinced, though.
Thanks, you nailed it. By the way, I’m not really concerned with the financial crisis here - I get that mortgages are a different thing.
You’re not convinced that the stock market is beneficial to society?
Short term buying and selling does not create wealth. It creates liquidity. Liquidity is required for the stock market to work.
The onion market is a good example of the volatility of a commodity market with no futures market (no speculators, just growers and end users).Here’s a great chart.
No? puddleglum’s reply helped a lot, though. But as I said, I can see that shares are good, some trading is a necessary and not terribly harmful byproduct of this, but what I have problems understanding is how people making a living off just trading stock are contributing anything. I think I understand the bit now about smoothing the prices, but I’m ready for more arguments, if you have any.
It’s only a “zero-sum game” on the specific transaction, but that’s the nature of the majority of transactions: I give a store $3 for a jar of peanut butter, I get a jar of peanut butter worth $3. Zero sum game.
On the other hand, once you add the element of time, it is rarely a zero-sum game to the buyer or seller. If I buy a 100 shares of Ford @ $10, then sell a month later @ $12, then I gain $200 and the original seller loses his potential $200 gain.
To the larger question posed by the OP, the true value of the stock market is the gathering of information - what is my company worth? Is my strategy looked upon favorably by the market? Is this a good time to issue additional shares, bringing in additional capital? It is extremely difficult to answer these questions in a world where secondary stock selling is illegal as you can’t even answer the most basic of question “What is this worth?” because you can’t answer with the most basic of answers, “Whatever somebody will pay for it.”
Look, there’s a whole lot of jobs in the world that I think are, in various ways, generally distasteful to me. Personal injury lawyers. Plastic surgeons. Mixed martial artists. Used car salesmen. Trophy wives. The list continues.
But there is a difference between not liking what someone does and advocating that it be stopped. I feel like I’m channeling Rand Rover here, but there sure is a benefit to society for people who help generate wealth, even if that wealth is not represented by a tangible thing. Money is good, and considering that somewhere around half the country has investments in the stock market, having traders make smart, profitable decisions on behalf of individual investors, your pension funds, or mutual funds is a pretty damn good thing for a lot of people.
Now, where there are specific complaints with how someone does their business – like an attorney taking advantage of a car accident victim to get him to file a lawsuit without the victim having a full understanding of what’s going on, or unsavory efforts between bond traders and the rating agencies to prop up bad investments – that’s the kind of stuff I can get behind and say that ought to be changed. But it is pretty unfair to charge a whole profession with being unnecessary and ethically distasteful when the benefits of that profession aren’t being clearly understood.
Liquidity is very useful because it allows more people to invest and make investments. An illiquid invest is like a Monet, it is very valuable but if I need money tomorrow, owning a Monet does me no good. Thus only rich people who do not need money quickly invest in Monets. If you have the money in a stock you can call your broker and have the money in your hand tomorrow.
Stock markets turn illiquid assets like companies into liquid ones like stock. This increases the number of people who can own the assets and the amount of money that is invested. This increased investment is what allows companies to expand and hire people. Also most companies retain a large portion of their own stock. When the stock goes up this allows them to invest in new people and equipment.
Except that that’s a false analogy, as economics is a social science rather than a natural one. In fact, arguing about the nature of a financial system is no different than arguing about the nature of a political system. If a poster stated that they wished to cancel the Electoral College, you might disagree with them, you might say that their idea is stupid, but you couldn’t say that their proposition is *objectively *wrong. Advocating the cancellation of the current system of stockbroking is no different; both are human constructs defined by laws and by social behavior. There is no “right” or “wrong” to them in any objective sense.
Because there are other reasons why the company appreciates that has nothing to do with the efforts of workers and investors. Off the top of my head I can think of:
- Regulatory and tax policy changes,
- Outside events that benefit the company (for example, if the price of gasoline sank to $.25/gallon, Ford/GM/Toyota, etc will benefit greatly),
- Systemic events (for example, if the unemployment rate dropped this month to 4%, you might see a rise in the price of payroll/HR service firms (like Insperity/Administaff), even if they themselves did nothing to reduce the unemployment rate).
However, the price of the stock, which is determined by traders, reflect this news without the company having to do anything.
If it makes you feel any better realize that day trading stocks for money is phenomenally difficult and that most who attempt it quickly lose their shirt.
Ravenman: I don’t understand your beef - I just wanted to know what the benefit of trading is, something puddleglum and JohnT answered excellently. If it had been the case that the entire profession was parasitical, earning money on a practice that did no good at all, then I would bloody well be entitled to criticise it. I didn’t, I asked what the benefit was, admittedly without veiling my suspicion that speculators might not be as admirable people as those working absolutely necessary jobs with far lower wages. I stand partially corrected (I still suspect earnings are out of proportion with services offered), but I do not feel obligated to excuse having posed the question.
You didn’t understand my post. I’m trying to get you to take a step back from the issue you are asking about and think about why you asked the question you asked in the first place. You seem to think that a thing has a “right to exist” only if you personally are convinced of its usefulness to society. I’m wondering why you are so enamoured of your own opinion about a thing’s usefulness to society.
Look, I would be perfectly happy if the world did not contain Justin Bieber’s music, dildoes, Indian food, the lottery, Occupy protests, and probably a hundred other things. But I don’t ever think that anyone has to prove to me that those things benefit society. Some people like them, so they exist, and that’s really the end of it.
Basically the OP is wondering why professional traders deserve to earn huge salaries and bonuses, relative to what they actual do. To a certain extend he may be correct. I know a number of traders and many of them are worried that their jobs are going to be replaced by computers over the next several years.
Really what traders are doing is creating markets and looking for inefficiencies, thus making them more efficient. It benefits the rest of us because economies work more efficiently and more wealth is created when goods and services can be readily bought and sold.
Now stop hating on money!
But if you had a suspicion that Justin Bieber’s music poisoned little children, and access to an excellent message board where you could get the straight dope, wouldn’t you ask? Of course things can be quite well justified without me understanding how they are. But when they make me suspicious, I’m perfectly entitled to investigate, which is what I did. I only wrote that trading seemed parasitical to me to provide context for even asking the question.
Professional traders are most often dealers or market makers in stocks. Their business is no different from a dealer in anything else - books, baseball cards, cars, groceries, etc. They aren’t primarily concerned with whether a stock is going up or down. Rather, they’re trying to earn a profit on the “spread” - the difference between the bid and the ask. The more dealers there are competing against each other, the better it is for you, the customer. It is much cheaper for a retail stock customer to enter and exit the market now than ever before. In most liquid stocks the spread is tiny. Even ten years ago, spread were significantly wider than they are now.
Imagine you buy 1,000 shares of XYZ with this market: 10.00 bid x 10.25 offer. Your price would be 10.25. A year later the stock has gone up and you wish to exit into the following market: 12.00 bid x 12.25 offer. You would exit your position at 12.00 for a gain of 1.75/share or $1750.
Now imagine a more liquid market. Your initial buy is in a market quoted 10.12 bid x 10.13 offer. You sell into a market 12.13 bid x 12.14 offer for a gain of 2.00/share - $2000. Having a tight, competitive market being made by active traders competing against each other translates into less “slippage” for you and better prices.
The recession and the flash crash shows that there is a problem - but something like 200 years of stock trading shows that the problem isn’t stock trading per se. They piled derivative on derivative on derivative until the head of the Fed didn’t even understand what was going on, not to mention the heads of the companies doing it - who were happy as long as they were making money. The real question is where to draw the line.
But you haven’t even attempted to make an argument that the existence of stock trading is harmful to society. You just showed up and demanded that someone show you its benefit to society (implying strongly that you believe it shouldn’t exist if ýou don’t see any benefit).
I call your mindset here “the necessity concept,” and it’s rampant among a certain large subset of posters here. It often shows up in pure form (eg, “you don’t need a gun/SUV!”), but is sometimes more disguised (as in your OP). I’m trying to get people to examine why they sthink something shold exist only if they personally find it necessary (not having much impact so far, I’m afraid).