In what way does a stock purchase constitute an investment in the company? The company will NOT stand a better chance of making a profit simply because I bought their stock. I am simply taking the place of the person who I bought the stock from.
Two quick reasons come to mind:
Stockholders have some input into how the business will be run (i.e., they can vote on certain actions the company offiicers want to undertake and they can indirectly fire the company officers if they can scrape up the votes.)
Stockholders often receive dividends, which come directly from the bottom line profits the company makes. The closest casino gambling comes to this is when they give out free drinks to encourage more gambling.
BTW, Keeve, I’m sorry I repeated much of what you said about dividends. I was trying to emphasize the distinction of dividends, but once I posted I realized I had left out 90% of what I had intended to say. I’ll let that matter rest now.
RR
Both Keeve’s and River Runner’s posts reminded me of something that is probably an aside to the discussion, but is interesting, so I’ll add it anyway.
In North America, racetrack winnings are usually called “prices,” or sometimes “mutuel prices.” As in, “The prices are posted and my horse paid $6.40.”
In Australia, they are called “dividends.” As in “The dividends are posted and my horse paid $6.40.”
I’ve had no experience with going to racetracks outside Canada, the US, and Australia, so I cannot comment on what other countries call race track winnings.
But I do find it interesting that Australia uses the same term to describe race track winnings as when an investment pays off.
I also should have mentioned in my original post, as Keeve points out, that the money goes to the company only in an IPO, rather than any time the stock is traded. After the IPO, money and stock are just changing hands. Good point, Keeve, and thank you for reminding me.
Dividends are not the only way for a stockholder to make money. If the value of the company goes up and the price of the stock increases, the stockholder has earnings on paper that can be gained by selling the higher-valued stock. In many situations, it’s better for the stockholders if the company uses capital for things besides dividends such as acquiring other companies, capital investment, etc.
Also, on the IPO issue, the price of shares is important to the company even after the IPO. Shares sold by investors after the IPO don’t supply capital to the company, but the company may issue more shares, sell shares held in reserve, or offer stock options to employees. In each case, an increasing share price is very beneficial for the company.
No. Insurance is a means of spreading a given risk among a large pool of at-risk people. At the policyholder level, insurance represents the trading of a contingent, catastrophic cost (the risk) for a regular, low cost (premiums).
I’d be willing to allow that betting on the outcome of a horse race based on analysis of prior performance, jockey’s record, competition, and track conditions is a lot more like investing in stock than, say, playing roulette in Atlantic City. However,if you win, you don’t get a share of the horse’s FUTURE earnings. (I once got a “backstage” tour of Bally’s Park Placxe and somebody explained how roulette wheels work, causing me to ask “But why would ANYONE play this? It’s obvious that if you play long enough, you’ll win about half the time,lose about half the time, and slowly bleed yourself dry when the ball falls into the house slot! That’s NUTS!”)
However, Attrayant has something of a point when he talks about sleazy brokerage houses. The SEC busts these guys as often as they can. We’re talking raids, arrests, and jail time. However, no police force in the US, inclduing the securities cops, has enough personpower to catch every criminal…and Barnum’s Rule is still in operation.
I work for a large brokerage house as an attorney–we have HUNDREDS of lawyers here whose sole job is to make sure that we only play “by the rules.” You can’t believe how regulated this business is!
(rant on) Why do people say that investing in the stock market is hard? Just buy into an index fund and forget about it. Most people lose money when they move money from one stock to another. Any gain is the taxed plus transaction fees for the buying and selling. (rant off)
Any how insurance is a lot like gambeling. (For the purchaser…for the seller it is simple stats.) The lower the risk of payoff the cheaper insurance prieums are. With a large enough group it is a simple matter of odds or the insurance companies. They simply look at what the percentage of people who will die in a group of your criterea. It is then a matter of getting enough people to buy insurance to cover the expected payoffs and profit for the company.
When you gamble at a horse race or in a casino, the odds are in the house’s favor. When you invest in the stock market, the odds are generally in your favor (averaged over time and the various choices for investing). Plus there is all the research that you could and should be doing prior to investing. Good luck researching the past performance of a slot machine (of course, this doesn’t apply when talking about sports gambling, which could conceivably be researched somewhat).
It’s been said before, but let me reiterate: when you buy a stock, you’re buying a part of the company. It doesn’t matter if you buy it from another investor as opposed to buying it from the company itself, just as if you were buying a restaurant it wouldn’t matter whether you bought it from the original owners or the person who bought it from them. You still own a part of the business.
Yes, when you get into options, things get a little murkier.
This is another reason why I feel that horse racing is more like stock investing than it is casino gambling.
The odds are set at a horse race by the bettors themselves. Under the pari-mutuel system, odds on a certain horse are the ratio of money bet on that horse to money bet on all other horses. The house (that is, the track) has nothing to do with setting the payoff odds. Those are left to the bettors to decide through putting their money down and backing their choices with their stakes.
What the house (the track) does do is to take a percentage of the wager pools. This way, they generate revenue on every race, no matter how much or how little is bet on it. Or who wins.
In some ways it is like the commission paid to brokers–they will make money on trades, no matter how much the investor earns or loses on the trade.
Of course you can’t research the past performance of a slot machine. Or dice or wheels for that matter. Those are chances, where each roll or turn is independent of the last one, and no roll or turn affects the next one. But you can do research and make an educated guess with horse racing–thank you for the concession, Aunt Pam!
If this is off-topic, I apologize. But I’ve always wondered what happens when a company issues NEW stock.
Suppose they initially sold 1000 shares, one share each to 1000 people. Each of those people owns 1/1000 of the company, and they start selling and trading among themselves and to others.
Now the company decides to sell 500 more shares. EXactly what is it that they are selling? Are the first 1000 shares suddenly worth only 1/1500 of the company? Can’t be; that’d be stealing from the current shareholders. Are the new stocks for a new division of the company? Can’t be; the current shareholders own fractions of the new division too.
I would tend to agree that the essence of gambling is not really comparable to that of investing in stocks or shares.
Also, I’m not really convinced that insurance amounts to an instance of gambling. As I see it, gambling is neither based upon the principle of indemnity nor on the principle of insurable interest. To take any example, do you think that a person, for instance, gets his house insured with the intention of betting against the insurance company that his house will burn down before he pays them too much money? I don’t think this would be a correct representation of the nature of the transaction. People get their houses or their properties insured not as a bet or a wager that the property would be destroyed before a specified time, but as a security against accidental loss of that property. I don’t think that a person who has his house insured desires the insured event to actually materialise. I’m sure he would be as keen to avoid the accident as the insuring institution, if not more. As I see it (and I could well be wrong), this obviously is not the case in gambling. If you would take a close look at both gambling and insurance, you can see clearly, in my opinion, that the operational mechanism, the intentions of the parties involved and the results in the two cases are quite distinct from each other. There seems to be absolutely no relationship between the two.
(1000 Shares)* (Stock price $20) =Company Value $20,000
Company sells 500 new shares at $20 each for a total of $10,000
(1500 shares)*(Stock price: $20) = New company Value$30,000
It is not stealing because 1/1000th of a $20,000 company is worth the same as 1/1500th of a $30,000 company. The extra $10,000 is injected into the company by those who purchase the new shares.
Keeve - When a corp. decides to go public, the corporation gets authorization to sell millions, tens of millions, HUNDREDS of millions of shares of stock. When the offering is made, they will not necessarily sell ALL of those shares or they will after a time purchase some of those shares back.
Stock that is owned by the corp. is called treasury stock. Stock held in treasury does not count as a vote for the company or in figuring dividend distribution. It is effectively “out of commission” until sold by the corp. to an investor.
Now to answer your question, yes, the amount each one of the original stock holders went from 1/1000th to 1/1500th. It is not called stealing, it is called dilution. By putting more shares on the market, they are diluting the value of the stock. It is sort of an “inflation” effect. More shares chasing the same corporate earnings, therefore less value per share.
It does have the affect of lowering the value of each stock if the sale is large enough and also the amount each share will receive in dividends.
Therefore I think you can see that it is in the best interest of the corp. NOT to let that happen.
Not only that, but a company can go out and buy its own stock back from the public (at the current market price, usually a lot more than the original issue price), adding it to treasury stock. Then they can sell it again later.
Really strict rules prevent the company’s insiders (executives, board of directors, etcetera) from making personal profits by say, selling a lot of shares at a high price just before a stock dilution. BIG no-no!
Also, once a company is a going concern with a track record in terms of its earnings, profits, growth, ability to compete, it can get money the way you and I do: it can BORROW it. Either by borrowing it from banks (as loans) or from the public (through a corporate bond issue).
You know, once upon a time I thought finance was BORING. Then I got interested in the industry and discovered it was fascinating. The thrill of timing the market! Of closing a big merger! Of underwriting a $600 million issue of something or other!
About options, one of my favorite co-lawyers claims that the form you have to fill out to get your brokerage to let you trade options should have these words printed in very large type across the top: KIDS! DOn’T TRY THIS AT HOME!
Casino’s always win percentage wise. Yeah, a few shmucks may win big but in the long run you will always lose more than you win. That is how casinos make money. (I worked at Mandalay Bay for awhile, so I know who these things work). Anyone who can do simple math should know gambling is a loser. The odds are always in the casinos favor. Otherwise they all go out of business.
Stocks, on the other hand, almost always pay off for investors if you investigate, buy and hold. The average rate of return is about 10% since the depression. This year I have actually made money on the market even though it tanked. How, you ask? By research and finding bargins. Companies that actually produce something people are going to buy.
I think you have a false analogy in mind. Casinos != stock in a company that actully produces a product.
Gambling is an entertainment and an addiction. Stock market investing can be a form of gambline, as can the other investing markets.
But the real point of the investing markets is to make money over time. In stocks you are investing in the equity (part ownership) of a company. In bonds you are lending money. In commodities and insurance, you are involved in spreading risk.
Being allowed to issue stock in a publicly traded company, one that has gone through the mythical IPO (initial public offering) can be described hyperbolicly as a license to print money. You print too much and it becomes worthless, and it must be used for company purposes. It is very heavily regulated by the government.
Betting on a horse is gambling.
Owning the horse is an investment.
Both involve risk.
At least at the end of the day the investor still owns the horse.
With the wide lack of understanding about the fact that stocks held over the long term generally rise in price, whereas gambling chits don’t, no wonder US Social Security reform is going nowhere.
