Does stock market create wealth?

russ_watters

Right: the growth happens BETWEEN the transactions. Those are the "events" Tosh doesn't want to consider.

enosis_

Sometimes a stock's market price has very little to do with assets or the balance sheet. The price to earnings ratio is summarized in the following link.

http://www.investopedia.com/terms/p/...#axzz2HQQGw3UB

"The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings."

russ_watters

Ugh, I didn't see this before: As I said to Tosh several pages ago, don't let the complexity added by multiple owners confuse you into thinking the definition of "ownership" changes. It doesn't. The stockholders own the company. So "The company owns" is still synonymous with "the stockholders own".

And incidentally, since you were non-specific and you worded it badly, the case you described was for one shareholder: You set up the company and sold the entire company to me, making me the sole owner of the bar of gold. But since I know you meant there are multiple shareholders....it is still wrong. The bylaws may or may not include direct voting on policy. If the voting is direct, all you have to do is convince 50%+1 shareholders to vote with you. If the voting is indirect, you just have to do the same except electing a representative who will do what you want.

The fact that it is cumbersome for stockholders to make major changes in large companies and doesn't happen often does not change the status of stockholders.

In any case, this was already discussed in detail and I have rehashed more than I really wanted to. For fuller treatment, read back a couple of pages.

russ_watters

"Sometimes"

But over the long term, the average P/E ratio of the market stays within a relatively small range.

enosis_

I agree - but as link indicates - it varies by industry. The fun starts when a company has negative earnings (a loss) but still maintains an industry multiple.

BWV

Multiple of what? Not of earnings obviously

Investors are smart enough to discern that a company currently losing money may not do so in the future and price the stock accordingly

russ_watters

As well it should. Growth industries will have higher P/E ratios than stable industries because they are growing faster. So tomorrow's predicted earnings are expected to be much higher than today's. Basically, the earnings are expected to "catch-up" to the P/E ratio.

enosis_

Yep - except for those situations when they don't.

russ_watters

Sure -- it's a prediction. Sometimes predictions don't pan out.

nitsuj

It was really poorly worded, even to say I sold the company to you doesn't makes sense. I'll refine it more, just need to review the accounting.

Tosh5457

Russ, please use the game theory formulation, it simpler to discuss it. Yes, that happens, and what that means is that more players will come into the game (more capital to be invested). That doesn't change the nature of the game, like more players coming to a poker cash game table doesn't change the fact that poker is a zero-sum game (excluding house commissions).

You don't accept the fact that the company growing doesn't give the stockholders any direct benefit. The only benefit they'll have, in average, will be to see their stock rise in price because of others investors expectations rising. But a game just made of transactions will always be zero-sum. It doesn't even matter if the stockholders have the power to change something in the company or not, if they're not getting any of the profits companies get, they can only show a profit by selling their stock in the secondary market. And again, that's just made of transactions, it's zero-sum.

Anyway, I still haven't understand something. Russ, are you trying to say the stock-market isn't a zero-sum game in respect to the profits of the stockholders, or are you saying that only analyzing profits doesn't make sense, and something is missing?

BWV

So what do the aggregate real (i.e. net of inflation) gains and losses of all poker players since 1950 years sum to?

A. zero

what do the aggregate real gains and losses of all stock traders (gross of taxes and transaction costs) sum to?

A. a 5844.180% return (http://dqydj.net/sp-500-return-calculator/) including dividends. The price gain alone is about $12 trillion in current dollars

so tell me again how both are zero sum games?

enosis_

There are other possible benefits to investors including dividend disbursements, stock splits that increase the number of shares held and possibly warrants that could be exercised or sold.

Tosh5457

You're only seeing one side of the picture in the stock market case. Tell me, where did those $12 trillion come from?

BWV

that is beside the point - you said to use game theory jargon. The sum of the winnings is a positive number, hence its not a zero sum game

John Creighto

This would seem to be a different issue then the topic of the original thread as it only answers if on average people in the stock market benefit. On the whole, the stock market would create wealth to the extent it improves the efficiency of production by properly allocating resources. It would destroy wealth to the extent which it either hinders the allocation of resources (by hoarding assets, diverting liquidity away from smaller players) or adds an extra administrative cost which could be better devoted to other uses.

Given that in economics these days questions are often posed in marginal terms, it might be better instead to ask: if a small change in the wealth traded on the stock market would create more wealth (How would we measure this wealth and who would benefit from it?).

Remember that the stock market is not the only way to allocate capital. People can invest through savings, through profit, they can borrow from banks, they can borrow from friends, they can borrow from the government. The stock market favors large public companies. It is an irrelevant means of acquiring capital for private companies and small companies.

BWV

yes, but all you would have to show is that with a purely private market for companies the cost of equity capital would be higher