The Gaming Den

Josh_Kablack wrote:Treasury Conference Call Recording:

http://www.youtube.com/watch?v=uXmFADm61Rc
http://www.youtube.com/watch?v=1eqZoToIdfM
http://www.youtube.com/watch?v=8YwO3MkvjR0
http://www.youtube.com/watch?v=FnfyVGM-wfg
http://www.youtube.com/watch?v=mHTnqmJ_R3M

(youtube, sound recording only, I haven't had time to listen to it all yet)

"This video is no longer available due to a copyright claim by Securities Industry and Financial Markets Association"

Figures.

FrankTrollman wrote: Not entirely. But mostly, yes. The stock market is actively bad for the economy as a whole. Sure, there is some positive outcomes: a high stock market is a socially acceptable way to create value and thereby increase capital investment, and a high stock market encourages companies to sell stock in order to finance capitalization. But honestly, those are pretty small effects compared to the fact that a rising stock market encourages monetary investment in the stock market - which itself doesn't produce, serve, or do anything.

To a very real extent, every dollar spent moving stocks around is a dollar that isn't putting a sandwich on a plate, water in a fire hose, or a child through school. When people are incentivized to move stocks around instead of produce things, production falls.

I understand basic economic principles, but the stock market pretty much confounds me. Aside from the fact that each stock is a piece of a company and if you buy enough voting shares you can control the company, I'm not really sure of any of the stock mechanics. Supposedly there's some cause and effect, but I don't see much of that at all. I'm aware that good news about a company tends to bring stock price up and bad news brings it down, but I'm not sure exactly why or who sets the price. I'm pretty sure it doesn't have to do with the company's actual profits since I've heard of companies with no profit increasing their stock prices.

So I just have a bunch of stock questions.

How is the price set?
The money seems to pass just between individuals, and not to the company itself? So what's the point? You're not really investing in a company by buying stock, you're just paying a stockbroker. So how the hell does it work? If I buy shares of amazon.com, does my money actually ever get invested in amazon? Or am I just making a transaction with a stockbroker and not really doing anything? When I make or lose money in the market, where does that money actually come from/go to?

Then there's all manner of weird ass shit that goes on like stock splits and other esoteric events, and I'm not sure who decides that this shit should happen.

Here's my understanding:

The price is set "by the free market"; that is, it's what people are willing to sell it to you for. When you buy stock, some of that money goes to the broker and some goes to the previous owner of the stock. The company has already sold the stock, so it never sees any of that money: stocks are only a method for money to flow out of a company once they've been sold.

There are two ways to can make or lose money on stocks, and they're theoretically but not mechanically related. The value of the stock itself increases and decreases in a random fashion, with major events (research breakthroughs, patent cases, class action lawsuits, market crashes, etc) influencing it nonrandomly. You 'lose' money when that value becomes lower than what you payed, and gain when it becomes greater. You haven't actually gained or lost anything until you sell it, however.

The second way to gain money is via dividends. The company's profit is divided by the number of shares, and each shareholder gets her proportionate payoff. This is basically interest on you investment in the company, only it's based on the success of the company rather than the value of the stock. You can't actually 'lose' money this way; you can just make less. So this is the "point". Every year, money accrues in your bank account based on how much they companies that you're invested in "profited".


A stock split is when the shareholders decide to split the stock. Each individual share is worth less, but each shareholder owns proportionately more. Then you can sell the stock with greater granularity. It's also cheaper to buy a single share so that you can attend shareholder's meetings and the like.

If I understand the stock market right:

Companies can make money off of sales of their own stock, and often do when they need to raise money quickly. However, they do this by issuing new shares, which they don't do often (it's bad for current shareholders); most stock transactions do not involve the company the stock is in. You're only actually investing in the company if you buy shares from a new issue; if you buy from anyone else, you're buying a certificate that says that someone at some point invested in the company and entitles the bearer to a share of its profits.

Moving stock around on the stock market only benefits the company that you're buying stock from a little, in that fewer people would want to buy new stock if they didn't think that they could re-sell it for a profit. However, as long as the initial investors expect that anyone will be willing to buy secondhand stock and have enough money to move it, this isn't a problem.

So, yes, buying on the stock market is (if I understand it right) a transaction between you, your stockbroker, another stockbroker, and a selling shareholder; you will never know who these last two people are. The company is not involved and doesn't actually even care about this transaction; as long as the first buyer expected that they'd be able to be the seller in this transaction, the company got what they wanted out of it. Of course, it's far more likely that the seller that you're buying from was, themselves, a buyer from someone else, and so on back.

Losing money in the stock market simply means that you bought stock that depreciated in value; making money can be dividends (in which case the company is paying you for owning the stock) or your stock appreciating in value.

Stockholders are represented on the company by a board of directors, who pick the company's top executives. Each voting share of stock one owns entitles them to one vote for board positions, but most people don't do anything with this and can't significantly influence the election, anyway. You can take control of a company by buying enough voting shares to replace the board of directors; of course, they didn't get there without owning significant chunks of the company; that's why buyouts of big companies tend to cost billions of dollars.

IGTN, that's almost exactly right. The caveat is that some of the share holders are also employees and/or owners of the company, who can sell shares in the company in order to capitalize. Big companies basically don't do this however.

-Username17

My understanding:

Don't forget short selling: http://en.wikipedia.org/wiki/Short_selling

tl;dr version: You get money by buying high and selling low.

During the current stock market crash, many people lost a ton of money. But others who understood the housing bubble bet against the market and used short selling. They made billions of dollars. For example George Soros came out of retirement just to short sell and make ~3 billion dollars.

In more contemporary terms, the Casino Royale Bond Villain's shtick was basically short selling.

Also, many stocks are automated to sell off if they dip below a predefined value, usually in the last hour of trading. As a result, you get cascading sell offs.

All these reasons are why the stock market has been so volatile over the last weeks. The system rewards and reinforces instability, especially when confidence oscillates because of uncertain governmental investments worth 700+ billion dollars. If the government was actually competent, and had contingency plans, the current financial crisis would be much less dire.

The goal of all this speculation is merely to game wealth out of the system. Like a casino. That's what Day trading is.

However, in the current situation, this is an example of what happens:
1. Company sells a stock share for 20 dollars.
2. Stock rises, gets sold back and forth between investors.
3. The stock rises to 100 dollars, and subsequently crashes to 10 dollars.
3b. It is important to note that nothing has changed within the company. It still produces products, and it is still as fiscally viable as when it was selling at 100 dollars a share.
4. In reality, those 90 dollars per share, just no longer exist.
5. Final step: repeat the above, to a lesser or greater degree, on a global scale.

Compared to one year ago, the world has the same production capabilities to produce goods. The world has the same ability to provide services. However, our financial system is based upon bullshit voodoo confidences which make money appear and disappear out of nowhere. So now the world has much less money to buy things (and lending to buy things).

So the world might be declining into a second Great Depression with lower standards of living across the board, purely because of our financial system, and not because we can't produce and distribute products to people.

That's how we do things. IN AMERICA! (And by extension, influencing the rest of the world).

CatharzGodfoot wrote: The price is set "by the free market"; that is, it's what people are willing to sell it to you for.

But it's obviously not possible to chart the free market accurately enough to determine what every guy might sell it as. So somebody has to be making that determination as to where to set the price, because otherwise you'd never be able to have stock prices move in any kind of real time.

I mean I realize it's a buy low, sell high strategy, but I'm still not certain where the price comes from. When someone decides that Microsoft's stock dropped by $1, where does that come from? Is it a coalition of stockbrokers? is it microsoft itself? Is it a computer program that tracks trades and produces some kind of average?

There is no absolute "free market" value of anything. Go different places and different things will be worth different amounts. Someone has to give you that standardized price, and I'm just wondering who that someone is. Or are all stock traders linked to some kind of Borg collective that I wasn't aware of?

IGTN wrote: Companies can make money off of sales of their own stock, and often do when they need to raise money quickly. However, they do this by issuing new shares, which they don't do often (it's bad for current shareholders); most stock transactions do not involve the company the stock is in. You're only actually investing in the company if you buy shares from a new issue; if you buy from anyone else, you're buying a certificate that says that someone at some point invested in the company and entitles the bearer to a share of its profits.

Who makes the decision to make new shares? Is it a vote from all the shareholders or is it the CEO or what? And if so, where do the new shares start existing? I assume they're sold to some kind of stockbroker to start with, but what's the actual process by which they're created?

Well, as each piece of stock counts as an ownership share, you're supposed to be entitled to a piece of the profits from the company (paid as a dividend, but the details are determined by the board) and you also gain some measure of control over the company (voting rights). So the stock price is a reflection of how well the company is doing right now, and how well you expect it to be doing in the future, and a vague barometer of how much of a dividend and over what time frame you can expect. As a company does better or worse the potential future dividends are adjusted, and that makes it more or less valuable to whoever owns or wants them.

Bad news from a company that would decrease the value of the dividend will cause buyers to offer less to purchase outstanding shares. If there are more sell offers on the floor than buy offers on the floor, supply and demand kicks in and the price drops. If the price drops for no reason, paranoia (i.e. "what don't I know about this?!?!") or plain old herd mentality may take over and everyone starts selling, again dumping the price. If the company went big on the idea that they'd sell themselves to another company (so stock prices went up in anticipation of a necessary buyout) that never happened, stock prices would plummet since no one wanted to buy them. The inverse of all of those are possible as well, as happens when stock prices go up.

Stocks on exchanges are traded publicly, and all the sale prices and offers are recorded. The stock price is basically some aggregate of current sale conditions or offers. There's standing offers at certain rates, and standing sell orders at other prices and shit that complicates things though, and people really do chart all of the standing offers and the current sales. It's a lot like saying a painting is worth X because that was the last offer anyone received for it.

Bonds are debt obligations, and once they're traded on the market their price is determined by their supply, time left until maturity, and the likelihood of the debtor paying you back entirely.

The decision to sell new stock shares is made by the board, and is the only way that a company benefits from having a high stock price after their IPO. They can sell any shares left over from their IPO that weren't put on the market (total possible shares is determined before the IPO, but most of these aren't put up for sale. these shares have no voting ability), gaining the avg. share price * number of additional sold straight to their treasury. They can also buy back shares when they feel like it, and those shares have no voting ability.

Stock splits are often done when a stock price gets too high to be useful, and is again determined by the board. Each stock out there becomes two stocks, and the price per share drops by a bit less than half due to wacky macro-economic factors, the reduced dividend and voting ability of the shares, and the increased supply. Current shareholders generally don't care because they still have the same voting control, dividend potential, and stock value because they still own the same percentage of outstanding stocks.

I don't remember the conditions that lead to new bond offerings, but I think I've tossed up enough for now anyway. Yay securities licenses :-/

http://www.npr.org/templates/story/stor ... d=95395712

There's a podcast link at the top there, that I found to be pretty helpful in explaining a lot of the bailout questions I had. The written article summarizes the podcast somewhat, but honestly I've only skimmed the text since I already listened to the podcast first.

It explains what credit default swaps are, and why/how they screwed us so hard; explains why/whether we need a bailout; explains what sort of bailout Paulson has in mind, and offers insight in an alternative form of bailout action.

[edit: Disclaimer: the report/podcast is from October 4th, but it still didn't seem that dated to me which is somewhat amazing considering how rapidly things keep happening. It is also the 2nd part of a two-part address to some bailout questions, but I didn't listen to the first part so I can't make any recommendation there]

clikml wrote:http://www.npr.org/templates/story/stor ... d=95395712

There's a podcast link at the top there, that I found to be pretty helpful in explaining a lot of the bailout questions I had. The written article summarizes the podcast somewhat, but honestly I've only skimmed the text since I already listened to the podcast first.

Thanks, I'll skim it too but without the podcast even though NPR tends to be rather well scripted.

The alternative bailout mentioned there is what we'll actually be doing: we're buying special preferred stock (normal dividend order is preferred stocks then common stocks, we preempt all of them now) in banks instead of just picking up crappy assets. It should recapitalize the banks so lending begins again without leaving tax payers with stacks of shitty assets that we can't adjust anyway because it's only one piece of a split bond of many different loans. It's the plan that most economists preferred anyway, and there is some historical evidence in favor of it as well. The reason why it wasn't just the plan they went with from the beginning seems to be that they didn't want to anger the banking lobby, and telling banks that we were going to partially own them and dictate terms or business practices to them would have pissed that lobby off lots.

There's more current podcasts and articles up at the NPR planet money blog. There are some recent This American Life episodes on the economy as well.

You're only actually investing in the company if you buy shares from a new issue; if you buy from anyone else, you're buying a certificate that says that someone at some point invested in the company and entitles the bearer to a share of its profits.

Well, technically you're "investing" in the company in the sense that you're buying a piece of it. However, the company doesn't get any money out of the deal, and thus none of these wonderful capital improvements defenders of the stock market talk about happen in these transactions.

The problem with the stock market is that it evolved from a means of buying the right to a share of corporate profits to a speculative market is little more than legalized gambling on the fates of major companies.