Does stock market create wealth?

nitsuj

The part in bold is is the sole point to my disagreement with you regarding the connection between equity & stock having a direct link to that equity. It simply doesn't in valuating the vast majority of a stock's price, and most often absolutely doesn't in un-favorable liquidation. A slight case could be made for mergers, however the balance sheet is plugged in those cases, and is a snapshot of speculation of sorts, not "real equity".

The reality of business' finances is never a snapshot, a stocks price reflects that...both positively & negatively.

lastly note the transaction entry for such an entry [a] transaction...

DR - cash
CR - Equity

stock is not even remotely similar to a loan, less the increase in assets.

exactly like when I find $20 on the ground. I don't owe anyone and I didn't commit anything. consideration is the technical term I think.

There is a number of different types of shares but common ones, a big part of the value of common shares is no different than the extrinsic value of that $20 bill.

nitsuj

? My wording says that, you have to read all the words. The sentence was "There is no calculation assets - liabilities = equity / number of shares = share price"

russ_watters

Here's an article discussing what happens to creditors and investors when a company goes bankrupt: http://stocks.about.com/od/understan...21308bank3.htm

I'm thinking you missed the point of the example. I'm trying to present a highly simplified example as a starting point. The value of a stock is usually higher than the sum of the its equity because it is usually based on potential future earnings. If that's what you're disagreeing on, we don't really have a disagreement.

russ_watters

I'm confused. It looks like you said "there is no calculation" and I said [paraphrase] "there is a calculation" to determine the share value.

nitsuj

Just to keep my disagreement with you clear it's with the above perspective I disagree with.

There isn't "real value there".

In turn your comments so far have been in agreement with me.

nitsuj

My bad,

Of course with a snap shot valuation you include real assets...weighted in order of "solidity/liquidity". But that is merely a starting point for valuation.

enosis_

The shareholder is held accountable for losses - risking up to the value of their shares. If a company has losses and assets are liquidated - the value of shares decreases to a minimum $0 value. However, as long as the shares are not sold or destroyed, it might be possible for the investment to regain value.

nitsuj

from the perspective of liability to the company the value was always zero. business is a going concern...in turn not a liability to the company.

ask what is the difference between a loan and contributed capital....it's what you are entitled to.

enosis_

My point is the owners of the shares risk 100% of their investment.

Tosh5457

Yes that's my premise, but I don't think I'm wrong. The great majority of traders are speculators and hedgers, they really don't access the wealth of the company. The only stockholders who do are the ones that have more than 50% of the outstanding shares, but those won't affect the game in any significant way.

By the way, I found a finance professor of Southern California University (who is also Chief Economist of the Securities and Exchange Commission) with a paper supporting my view too. Not that it's significant to this discussion, I'm just referring it so nobody thinks I'm the only one who thinks this:
http://www.turtletrader.com/zerosum.pdf

BWV

You misunderstand the paper, it does not support an argument that stocks in aggregate are zero sum. it makes the point,which I made earlier, that trading stocks is zero sum relative to investing in the broad market, say through an index fund. This is because the average return of all traders is the market return. This is not a controversial point and does not contradict the fact that over time the value of stock prices track changes in fundamental business values

enosis_

I don't think all passive investors are speculators, some are looking for dividend income. Active investors are the only ones that might "access the wealth" of a company. They also have more risk.

russ_watters

Whether that is true or not, it does not change the fact that they can. Again: it doesn't matter if they do, it only matters that they can. I don't know how you could get the impression that the article agrees with you. The very first sentence of the abstract is: Which means that every individual transaction is zero-sum, as we already discussed: On average, when you pay $100 for a stock, you get $100 worth of value in a piece of a company. (100-100)+(100-100)=0.

That's: (buyer gain - buyer loss) + (seller gain - seller loss) = 0

The point of the article is that successful traders (those who buy and sell in short timeframes and are in category #1) are able to spot speculation and win, like in a game of poker. They might buy a $100 piece of the company for $90, gaining $10 and causing the person who sold it to lose $10. (100-90)+(90-100)=0. Notice that the buyer's item gained and seller's item lost (the actual value of the stock) is $100 in each case.

This is explained in further detail in the beginning of paragraph 1.2.3, but I can't cut and paste from the article, so you'll have to page through it yourself.

In any case, since this article is about category #1 (speculative value), it doesn't really address your question, which is about category #2 (actual value). It doesn't discuss the issue of actual value beyond merely stating that it exists.

Tosh5457

Why? How is the value of the company translate in money to the accounts of the traders, if they don't access its wealth? How is that "fundamental value" exactly going to change the game?

Indeed that article doesn't support my view, but it doesn't contradict it either, so it's irrelevant.

russ_watters

The value of the company sets the value of the stock, so when the value changes, it creates profit in a long-term investment.

I don't think that's a useful question the way you asked it though. The question makes it sound like you think the profit must come from the transfer of wealth from the company to the investor. That isn't the case. In fact, as related to stock price it's backwards: paying dividends reduces the value of a company instantly and through the transfer of value. Remember, all transactions are zero-sum, so if the company hands you cash, the company has to lose value to maintain the equality.

russ_watters

Actually, the fact that stock prices tend to drop on dividend day is a very good demonstration of the issue of stock value. And articles abound: http://usatoday30.usatoday.com/money...nds/52397766/1

enosis_

From the link (my bold highlighting)

"The reason the stock falls when a stock goes ex-dividend is simple. When a dividend is paid, a portion of the company's value is being transferred from the company's bank account to the accounts of investors. That draw down in value is to be expected because paying a dividend reduces the value of a company's assets. The ex-dividend date is such a powerful force that it's usually noted in the printed stock price tables in the back of most newspapers.
Some investors might feel slighted when a stock falls on ex-dividend date, but they shouldn't. The stock price is merely adjusting the fact that some of the company's value has been transferred directly to shareholders. The value of investors' total ownership, the value of the stock plus the value of the dividend, is unchanged."