First, thanks for the compliment.
This is different from his complaint. During this period there is going to be information coming in about the company, both directly and indirectly from the impact of the economy on it, and the price fluctuates, which is of course healthy.
But in the seconds of computer trading no new information has come in. This trading takes advantage of technical aspects of the trading system, and has nothing to do with either the stock or the economy.
An analogy: Back 35 years ago I spent a lot of time playing a multiplayer space war type of game on PLATO. We discovered that because of a glitch in the way the terminal updated the position of a ship on another player’s screen you could performs a short hyperjump, giving you an advantage. (I think Picard is famous for something similar.) Success using this had nothing to do with our playing skill, but only exploiting a bug. In this case everyone had equal access to the technology, but in computer trading poor shmucks sitting on their computers at home are always going to lose out.
Oh my god, a fellow PLATOite.
Oh and hyperjump in =empire was not a bug. It was a feature.
My understanding from the Federation training lesson that it wasn’t a bug per se but the way the system worked, and not something put into the code. I started when empire was still called michelin.
Now there was a spelling bug - and whenever I watch Star Trek I always here “Engerizing” in my head.
I played “Conquest” in 1974. I always heard that Michelin was a redesigned Conquest, and then they merged into Empire. No?
From here:
So .. you’re OK with us continuing to lay with financial weapons of mass destruction that have already exploded once? I feel all better now! You guys were right all along! There’s nothing to worry about!
And there’s also this:
Gosh, it’s good there are bright people around who understand this stuff and see that the numbers aren’t worrisome at all!
Look buddy, educate yourself some more on this instead of just repeating scare quotes you don’t understand. It is getting rather pitiful at this point.
Here’s one illustration of notional value and how it doesn’t mean something big and scary is going on. Say I borrow $100 million and have to pay interest computed at a floating rate (say LIBOR). And say that floating rate is currently at 3%, and I would be OK if it went up to 4% but would not be OK if it went any higher.
So, I find a counterparty to enter into the following swap: I pay them interest at 4% on a $100 million notional amount, and they pay me Libor. So, I’ve turned the interest I have to pay at a floating rate into interest I pay at 4%.
Now, what’s the big scary scariness with that notional value on that swap contract? Why does it spell the end of the world? Also, note that I may have used that $100 million I borrowed to finance a building that I put $20 million down on, so in our little universe here there’d be something like a 5 to 1 notional value to asset value ratio (end of the world, right?).
Of course there are other types of derivatives with notional amounts that mean different things, so this is just illustrative of one type.
:rolleyes:
You clearly don’t have the first clue about what derivatives actually are or how they are used. You do know that Mr Buffet himself also trades in derivatives, his rhetoric notwithstanding? Do you know why? Because used correctly, derivatives are damn useful.
Fire can help provide warmth, food, and energy. You wouldn’t ban fire just because it can also burn your house down.
The overall level of misinformation, misunderstanding and general ignorance in this thread is so off the charts I can’t quite wrap my head around it.
But we should be damn careful about giving matches to known arsonists…
You’re equating financial industry workers to arsonists? Nice.
Apparently there are some who would make arsonists look like nice chaps, perhaps they should be watched carefully?
Look, guy. I’ve been giving cites for my assertions. So far all I’ve heard from you is bluster. Warren Buffet, who’s not an anonymous internet poster, says derivatives are financial weapons of mass destruction. Put up or shut up. Show why they are harmless.
On edit, I see that Rand has made an attempt to argue why derivatives are harmless. More research for me at some point.
You cut and paste that from wikipedia, didn’t you? The rest of that page explains a lot of these issues. As usual, this conversation has veered off topic. Initially you expressed concern that the notional value of the derivatives market was so large. This is a common response when people have no real idea of derivatives are or what they do.
Rand Rover gave an example, here are some more examples for people who are totally lost:
An example of a derivative might be an option to buy 100 barrels of oil at 100$ at some point in the future. The notional value of this contract is 10,000$. But an option to buy 10,000$ worth of oil is not the same as actually owning 10,000$ worth of oil. Note that multiple derivative contracts can be applied to the same asset. Quite a lot of these contracts in effect cancel each other out.
A large portion of the derivative market also includes interest rate swaps. Two parties might exchange interest rate cash flows based on some notional principle amount. You might pay a fixed rate to someone else while they pay you a rate that varies. This can be handy to defray risk associated with fluctuating interest rates. It can also be a tool for speculation. This “principle” amount might be 10 million dollars but it’s not as though 10 million dollars is changing hands. It’s merely the number used to calculate the interest. But the notional value of this contract would be 10 million dollars.
Sigh. Which not to say that derivatives don’t have their problems. But I agree with DragonAsh. The level of financial knowledge on this thread, and this board for that matter, amazes me. I can only assume it’s lower among the general public. Most people don’t have a prayer of understanding even basic finance. I don’t know what the answer is or if we should even try to find one.
We are in one of these situations where I think the OP doesn’t actually know nough o what question he is asking.
Are we talking about the Financial Advisor type stock broker who works with clients?
Are we talking about a house broker who buys and sells securities or the firm’s inventory and executes large client orders?
Are we talking about a trader who trades for the firm’s account?
Are we talking about a floor booker on the exchange?
A NYSE specialist?
An investment banker?
A market maker?
What are we actually talking about here?
That’s the problem when you skip ahead.
Thanks. I skimmed but missed it.
Done. Changed the title to “What’s the benefit to society of stock speculation?” from “What good is stockbroking to the rest of us?”
I think I understand what motivates the question in the first place, and it’s not something that most of the (quite reasonable and correct) answers given have really addressed… there’s obviously a lot of tension right now in the US between (however you wish to phrase it) rich and poor, 99% and 1%, etc. But I think that there are many rich people whose wealth is not (or at least, not particularly) resented. Take Steve Jobs, for instance. He had ungodly oodles of money. Why? Because he created (or at least oversaw the creation of) a variety of things that people can point at and say “that thing is awesome… that thing makes the world better”. Steve Jobs’ existence very clearly benefited society, and I think people are generally comfortable acknowledging that, and don’t resent him his fortunes. Similarly for brain surgeons or movie stars or small business owners… people where you can say “that is the value that that person adds to society, and thus, they are compensated accordingly”.
For someone who makes money buying stock low and selling high, that connection is an awful lot more tenuous. And remember, we’re not talking about the existence of the NYSE as an institution. It doesn’t take a preposterous amount of thought to recognize that its existence allows for the existence and dynamism of corporations, which obviously (for all their much-discussed flaws), obviously do contribute things to society. We’re talking about Joe Smith, who make a tidy sum betting that Apple’s stock would go up. How is society better at all because Joe Smith was alive?
Note that I’m not really endorsing this viewpoint… I’m certainly not arguing for a ban on stock trading or anything. But I do think there’s a fundamental qualitative difference between someone who makes money on the stock market and a lot of other jobs of similar status and recompense.
MaxTheVool, so you acknowledge that the stock market is a benefit to society…yet you can’t take it to the logical conclusion that if it wasn’t for people like Joe Smith, investing in the market and yes, sometimes making money, that the market wouldn’t exist to begin with?
At its very core, every market is about matching up two sets of people (or companies): People/companies that need money for whatever reason (maybe they want to build a new plant), and people/companies that want to invest (Joe Smith has $10,000 in the bank that he wants to put to better use. Or, a bank has $10 million sitting there that it wants to use).
The only way the primary market works (i.e., the market when the stock/bond etc is first created and sold) is if there is an active, liquid secondary market. No one would buy an IPO stock if they thought they’d never be able to sell it. Guess what happens if no one wants to buy an IPO stock?
Joe Smith may invest in Apple. Banks may invest to help companies such as Apple build factors. Pension funds may invest in companies that build the components and parts of the machines used to build the equipment that makes the products for Apple. You can’t separate Joe Smith and his trading in Apple shares from the rest of the entire process: Rewarding the risk-takers is at the very heart of our free-market economy.
Secondly, since I think this is important: I’d note that people get hung up on the idea of ‘speculators’, which is silly: by definition, almost all investors are ‘speculating’ - even long-term, ‘buy and hold’ investors. The basic difference between ‘investing’ and ‘speculating’ is generally understood to refer to the difference in risk: ‘investing’ is supposed to be risk-free. Strictly speaking, there is almost no asset in the world that is completely risk-free. US govt bonds are close - but only in the sense that they have essentially zero default risk. Even US govt bonds remain subject to interest rate risk, reinvestment risk, etc.
But we could just take a look at the difference between traditional, long-term ‘buy-and-hold’ investing, vs investors with shorter timeframes, that will use derivatives and such, or will short stocks, and the like.
Let’s look at a real simple example. Let’s say you have $100,000 invest, and I have found 1 stock I think will do really well over the next 12 months, and one stock I think will decline.
A long-only investor would buy $100,000 of the stock he thinks will go up. And that’s it. He’s limited to only buying what he has on hand right now, which is obviously a bad thing (it’d be really really hard to buy a house if you had to pay in cash), and he is limited in the direction he can take exposure to.
The long-short investor, however, will sell short the stock he expects to go down - his ability to do this will depend on how much collateral he wants to put up and how much risk he wants to take; let’s suppose he sells $100,000 short. Now he has $200,000 on hand to invest in the stock he thinks will go up: the initial $100,000, plus the $100,000 he got from selling the stock (note that I’m ignoring transaction costs, borrowing costs etc).
It’s not just Joe Smith that utilizes and can benefit from these and other techniques. Ultimately, financial instruments are about letting people/companies take a position in a view they have on their circumstances: It could be a pension fund that needs to generate returns for retirees. It could be a CFO trying to ensure proper cashflow for a six-year capital expenditure project to build a new factory. It could be a bank lending out funds to companies to generate returns so that they can pay interest on our checking accounts. While it isn’t perfect, markets helps us understand and price value, and ultimately we -all- benefit from that.
If you have a pension fund, or buy insurance, or have a savings/retirement plan, or even if you have a bank account that pays interest - you’re Joe Smith, whether you realize it or not.
Thanks MaxTheVool for an excellent reformulation of my question, and DragonAsh for an excellent answer. A few things, though:
You don’t address septimus’ point about enough liquidity - is it true that the primary market only benefits from a certain amount of liquidity? Could there be put restrictions on how many are allowed into the secondary market, to ensure that everyone who’s part of it, actually serves a function?
Also, what about day trading and computer generated trades - should they be limited?
And finally, the thing about pension funds is still irrelevant, I think - to the extent that speculation only redistributes money without adding value, it doesn’t matter how many people the money is redistributed to. If everyone with a pension scheme benefits from redistribution, it only means that more people outside will have to pay for it. Of course, if value is added through this (as I now believe it does, at least to some extent), then that changes things.
Here’s what you said originally:
This strongly suggests your objection was to the disparity between the two figures.
It now seems your objection is not to the disparity, but merely the risk associated with derivatives, or possibly with the risk associated with certain kinds of derivative markets.
I believe a cogent argument can be made addressing the latter. The former was simple ignorance.