Why is the Stock Market necessary?

[OwnedByFerrets]

Isnt it just legalized gambling? I know, that is a leading question, but what necessary purpose does the stock market serve? Why should it have SO much power over our lives?

www.wearableartnow.com

[abelenkpe]

1. I would like to know as well

Why can't we just have businesses do business without betting on them? Have stock markets always existed? I've asked this before and just gotten stern looks of disapproval which don't enlighten me. I'm an artist so any honest explanation would be helpful and appreciated from anyone who better understands markets and such.

[no_hypocrisy]

2. One of the reasons is to try to prevent fraud and corruption.

Without a standard for recording and calculating the value of a share of stock, a hapless purchaser could buy a worthless stock for an impressive amount of money. And for the sake of standardization, a share of stock at any given time should have the same value as another share of stock of the same company. A share of IBM valued at $80 can't be sold for a higher or lesser price until the uniform value changes. The Stock Exchange acts in accordance with the rules and regulations issued by the Securities and Exchange Commission.

[mainegreen]

3. Stock Markets are good things normally.

It's just that they need regulation, and frankly our government has sucked at that lately.

[Jim__]

4. My understanding - it provides easy liquidity for investors.

Investors will probably be reluctant to make largeinvestments in companies if, in order to sell their investment, they have to find a buyer. The stock market provides a large pool of investorsthat make selling your investments easy. Easy in, easy out. Business investments are easy to liquidate.

[TechBear_Seattle]

5. The stock markets exist to facilitate transacting business

The problem isn't with the markets themselves, but with speculation.

Each share of stock represents ownership in a company. It used to be that stocks would be purchased and held, their value measured in how reliably the company paid dividends -- a share of the company's profits paid back to the company's owners -- and how much those dividends were.

There has always been an element of speculation: you would purchase shares in a new company with the expectation that, eventually, it will turn a profit and start paying dividends. Since the mid 80s, however, speculators have ruled the roost. Few companies pay dividends any more, so the only reason to buy shares in, say, Microsoft is the expectation that stock will continue to rise in perceived value. This is expectation of increase is where the current problem is. It is not the markets themselves, but how they are being used.

As long as there is public ownership, there will have to be a way to trade shares of ownership. Stock markets have been around for more than 400 years and have proven to be a pretty good model for conducting such business. A much more pertinent question would be: What can be done to back off from the current speculative model and return to a trading model based on intrinsic value?

[AnneD]

9. Hear hear....

excellent defense, great observations. Years ago, stock shares were the main way that companies raised capital to improve and expand their companies. And I think the answer to our problem is tighter regulation and more transparency. Sunlight has a nice antiseptic quality.

[TechBear_Seattle]

17. The markets are already heavily regulated

The Securities Exchange Commission (SEC) was created as a result of the shennanigans that caused the Great Crash and was chartered by Congress to regulate all securities exchanges of national importance. The Financial Industry Regulatory Authority (FINRA) grew out of the National Association of Securities Dealers (NASD) and some regulatory power that had previously been vested in the New York Stock Exchange; it regulates the activites of brokers, dealers, financial advisors and pretty much everyone and everything that is not an exchange, including the NASDAQ system. In addition, each state has a body of securities laws and regulations regarding securities transactions and brokers.

Speaking as someone who got my broker's and financial advisor's licenses less than a year ago, let me assure you: there is no lack of regulation. :eyes:

Again, the main issue is that few stocks have instrinsic value nowadays, ie "How much is this stock actually worth?" Most stocks instead have only speculative value, ie "How much am I willing to pay/accept for each share?" That is a matter of attitude and can't really be regulated.

[OwnedByFerrets]

11. If it doesnt require a tome to explain it....

what would it take to fix it....because its obviously seriously flawed?
Would negating the Enron loophole that the fucker Gramm slipped into legislation help?

[Hugin]

15. Excellent explanation!

Very good.

I applaud your thinking! (and I wish I knew how to get back to the intrinsic value market as well)

One step in that direction would be to return the intrinsic value of labor.

[TreasonousBastard]

6. You've got to think of it as two markets...

One of them, call it the good one, was invented a few hundred years ago in Holland because it was so difficult to find investment money at one point. The joint stock company was invented to allow the little guys to throw money in a pot with relative safety. Stock issues are still a good way to raise money-- either in a new venture or to expand an older one.

The other market is pure speculation, where the underlying companies are almost irrelevant. Stocks become almost a currency unto themselves and are traded purely on the hope of profit no matter how it affects the companies.

Unfortunately, it seems one cannot have the first without the second, although we could do a far better job of regulating the second.

[FreeJoe]

7. The Stock Market is just a market for trading stock

Stocks are pieces of owernship in a company. If you buy a share of Microsoft, you own about one 10 billionth of the company. That gives you the right to one 10 billionth of the money earned by the company and a one 10 billionth say in how the company is run (indirectly through the power to vote on directors and proxies).

The value of a share of stock is the value of the future earnings the stuff the company has (assets) minus the stuff the company owes (debts) and the value of all the money it will earn in the future. Because no one knows how much money a company will earn in the future, there is not perfect way to determine how much a company is worth. Instead, we establish the value by letting people freely buy and sell their shares. The price at which buyers are willing to buy and sellers are willing to sell is the price of the stock.

The stock market is the place (sometimes a phyiscal place, sometimes a virtual place) where people go to buy and sell their stock. An investor is someone that buys shares of a company (stock) to get a share of the earnings of the company. They get that in two ways. The company can pay out some of its earnings in the form of dividends (checks sent to the shareholders in proportion to how many shares they have). Alternatively, companies can keep some or all of their earnings and invest it back in the company to increase the companies assets and future earnings. Which a company decides to do depends on a lot of factors, including its ability to grow with more money, the tax treatment of dividends compared with capital gains (the money an investor makes by selling a stock for more than they paid for it), and other factors.

A speculator is someone that buys shares of a company because they believe that someone else will buy them for more money later. They usually have a much shorter term outlook than investors and are concerned more about the perception of the company rather than the true earnings potential of the company.

The stock market has so much power because companies have so much power. Companies have so much power because that's how primarily we organize our economic production. The stock market isn't really the thing with the power. It's more or less the thing that makes the value of our companies visible. When companies are doing well and people are willing to pay a lot for them, the stock market does well. When companies are doing poorly and people aren't willing to pay much for them, the stock market does badly. In both cases, the market really just reflects opinions about the companies, it doesn't set those opinions.

It's a pretty lousy way to set the value of companies. It's subject to manipulation. It fluctuates far more than the real value of the companies. The problem is that there aren't any better alternatives. It's like democracy - it's the worse possible way to run a government except for all of the alternatives. Like democracy, it needs to be carefully managed/regulated to makes sure that it is fair and you need to accept the fact that, while it can always be improved, it will never be perfect.

[OwnedByFerrets]

10. Can it not be regulated in order to insure

to a certain point, that it doesnt ruin an economy?

[Xenotime]

8. It a tool for businesses to get money they didn't otherwise earn.

[crazymans economics]

12. I know a book that addresses this issue...:)

Not to self-promote my book, (Crazyman's Economics, available for $17.76 at www.crazymanseconomics.com or www.amazon.com) but we address the real necessity or the stock markets, and most of the posters above are correct. The markets provide free capital to companies with no obligation to pay it back. Dividends average 1-3%, if they pay at all (Microsoft, I'm looking in your direction).

From there on, you're playing a game with other investors, gambling to hope you sell your shares to someone else and make money before the share is eventually removed from the market.

The only real winners are the companies that receive free capital, the brokers and exchanges that make money on the churning, and the small amount of investors that make money at the expense of the masses that lose money.

Real reforms are needed return the market to its original intent, but as long as Wall Street continues to create new revenue streams (like derivatives), then the chances of Wall Street voluntarily reducing the amount of money coming in is zero.

[Xenotime]

14. Thanks for the book suggestion...I'll add it to my wishlist.

[leftofthedial]

13. to make the transfer of wealth from the lower classes

to the upper classes more efficient.

Still, it is less efficient than lotteries and legalized gambling.

[Hannah Bell]

16. so finance can screw people more.