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What if there was no stock market?

  1. Sep 30, 2008 #1

    I've been contemplating various economic ideas for the last several years and lately have been wondering what is the justification for even having a stock market?

    On a day to day basis, the frenetic movement of money between hands accomplishes absolutely nothing in the grand scheme of things. It produces absolutely no wealth, it just shifts it around from less savvy "investors" to those who have more of a knack for the game. For those who understand the game, it makes some of them absurdly rich for essentially doing squat. It inflates real wealth inside absurd stock valuations and creates enormous risk for people who aren't "good at the game."

    I understand that a finite, healthy economy requires the free flow of money, but it seems like the stock market is a strange backwater where there is enormous churn with little overall benefit to the society as a whole.

    If the enormous amounts of time and energy devoted to mastering the stock game were instead devoted to designing a stable system with high liquidity and low to zero risk, it seems like we'd all be much better off. For example, it seems like a pure bond market (with a couple of tweaks to eliminate penalties for pre term sales) would be a much better way to go.

    I would be very interested in hearing why the stock market is a good thing.
    Last edited: Sep 30, 2008
  2. jcsd
  3. Sep 30, 2008 #2


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    Well, to answer the question, you need to know the purpose of stocks. Do you know the purpose of stocks? Ie, what they are?

    The stock market is not just a big casino.
  4. Sep 30, 2008 #3
    At time of issue, corporate stocks are to raise capital for which you, in theory, get voting rights. In practice however, voting rights for small investors are pretty much meaningless. They can't set CEO pay. They don't write up golden parachutes. Many times, they don't even know what products a company may be developing.

    I disagree. That's precisely what it is. For investors, it exists exclusively, to turn a quantity of money into a larger quantity of money by betting that you will be able to sell your stock at a higher price without doing any work. That's the definition of gambling in my book.

    Long term returns on stocks are roughly 9 percent. A "people's bank" composed of pooled money from a large number of small investors that charged 9 percent interest on loans would be a vastly superior system. People who put money in the system would never have to worry about timing sells, distributing sells over several months to smooth out fluctuations, or coming up with complicated diversification schemes. Deposit when you want, withdraw when you want and all the while you get 9 percent interest on every dime you have in the pool.

    That would make credit more expensive, obviously, but it would force people to think more about when they use it, what they can afford and how long they really want to be yoked to payments on credit purchases. That would be a good thing in my opinion.
    Last edited: Sep 30, 2008
  5. Sep 30, 2008 #4


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    You're making strong assumptions here. Who says they're not doing work? Why do you think a flat 9% rate would be sustainable? Under what moral theory is your communist bank superior?

    Again, strong assumptions. Why do you say the redistribution of capital accomplish nothing? What makes you think a stable system like you describe could exist? If it could exist, why wouldn't a company market this today? (They could even sell stock...)
  6. Sep 30, 2008 #5
    In a real stock market .. dividends are the reason investors hold stock, but speculation seems to be the main reason people buy stock which is more gambling.

    If there was no stock market, ever .. I bet technology wouldn't have advanced as fast as it has.. And we'd have fewer middle men, and less inflation... Maybe people would be more self sufficient.
    Last edited: Sep 30, 2008
  7. Oct 3, 2008 #6
    I don't deny that it takes effort to master the stock game, but for most investors, the expectation is that they buy some stock, hold on to it for x number of years and viola! Their pile of money has turned into a bigger pile of money. This extra earnings requires absolutely no effort, work or thinking on their part beyond the initial decision of which stock(s) to purchase. Money for nothing.

    I have no opinions or theories as yet to indicate that it would. It's just a thought experiment.

    I'm not sure I'd attach morals to this idea but it would certainly be simpler. With the tweaked bond model I mentioned before, the "money pool" would more accurately reflect the actual total wealth of a population. With the real wealth known, it would be easier to measure growth and plan strategies to sustain that growth because we'd know exactly how much money the total population has to work with.

    Because, the primary goal of this redistribution scheme is to acquire wealth. In its current form, much of that wealth is imaginary and can lead to absurdities like Bill Gates, who at one point was so rich that he could have given every man, woman and child in the U.S. $150 and still had $5 billion left over for himself. He got that rich entirely because of the stock market.

    Even granting that Bill Gates is a business genius, there is no way that the ideas which led to Microsoft's success were so revolutionary and god-like that it surpasses the entrepreneurial potential of every person in the U.S. It's absurd on it's face to support a system that can create this type if individual power and wealth for essentially just sitting on a stock.

    I don't know if it could or couldn't exist, but it is generally true that when you reduce the variables in a system, it becomes easier to understand. If we swept away the evolved complexities of the stock market, I think we might be able to engineer an economy that promoted innovation, security and growth in far more predictable ways. Sort of the difference between building a house by haphazardly piling rocks and sticks, or hiring an engineer to design a strong, elegant and efficient home.
    Last edited: Oct 3, 2008
  8. Oct 3, 2008 #7
    Many high performing stocks don't pay dividends at all (Apple, Google, etc) it's pure speculation.

    If liquidity could be preserved in a stockless world, I don't see why technology would be slowed down. The trick would be to allow people to buy into the pool and withdraw from the pool at will and without penalty.
    Last edited: Oct 3, 2008
  9. Oct 6, 2008 #8


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    kotz, you are confusing why people invest in the stock market with why the stock market exists. Clearly, companies need a way to generate capital and stocks are an excellent way to do that by selling a stake in the company. But once you start selling something, a market is created. Whether it is used cars or baseball cards or stocks, a market will always spring up to trade such commodities.

    The question in the title is "What if there was no stock market?" Well, you tell us: how would companies raise capital if there were no stock market? How would companies even describe their ownership?
    Great for the investors, not so great for the borrowers.
    You are forgetting about inflation, though: high interest rates= high inflation.
    There are two different ways to play the stock market: investing and speculating. For investors (people who put money in with timeframes of years or decades), those issues do not exist. For speculators, well... that's a choice they make to play that game. But that isn't what most average investors do.
    Last edited: Oct 6, 2008
  10. Oct 6, 2008 #9


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    No, dividends are a pretty small part of the reason people hold stock (these days - they used to be a lot bigger). That 9% annual return is the main reason.

    Remember, the reason stocks appreciate is the growth of the companies who the stock is in. The reason the growth is so high (much higher than the growth rate of the economy) is that companies (typically) don't sell stock until they gain a certain level of stability. Something like half of all small businesses fail in the first year - and none of them are listed on the stock market.
  11. Oct 6, 2008 #10


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    How would you price risk?
    If the fixed return is 9% then the bank is run by burocrats who will only lend to safe bet companies likely to pay back 9%. Safe reliable companies like banks, car makers and airlines!
    Nobody would lend to some Stanford graduates planning to make a search engine. Since this is so much more risky you would more return for your money - eg a bigger slice of the company.
    Having a fixed rate would be like nationalised horse betting where the odds on each horse were identical! The stock market is like the Tote where the number of people wanting each stock changes the odds and so the return.
  12. Oct 6, 2008 #11


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    What is wrong with that? Why is it any better to get "money for nothing" from a savings account that generates 9% interest?
    The value of the ideas isn't what creates the value of the company. The value of the company is based on the income of the company. MS took in $50 billion in 2007, with a growth of 15%. With numbers like that, the stock value is well justified. And being the founder of the company, ownership of a large part of the company is well justified. It's true he is somewhat of a lottery winner, but the value is there in the company.
  13. Oct 6, 2008 #12
    Stocks, as partial ownership of companies, existed long before there was a formal open market for them. The market is just a convenient means of trading.

    Russ, I almost always agree with you but not on this one specific point.
  14. Oct 6, 2008 #13


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    Heh, you know what, you're right - I got that backwards. Inflation generally coincides with low interest rates.
  15. Oct 9, 2008 #14
    To be honest, I'm not entirely sure. Perhaps risky ventures would require smaller amounts from a larger pool of donors to spread out the risk.

    I'm not thinking of this "people's bank" as a traditional bank. It's more a common repository for money which is entirely managed by individual investors. It's just the place where all your "money" is stored.

    Sort of like an electronic version of Public Storage. You decide when and how much money from your account gets placed into and withdrawn from the "loan pool." Almost everything would be handled by computer so there would be no possibility for over leveraging, greedy middlemen, "creative" and highly dangerous financial schemes.

    In light of the current world wide financial meltdown, we need to put the breaks on some of this "financial creativity." It's not rational to base our economy on the fantasies of gamblers.

    I disagree. I think a lot of people would invest in promising startups. For example, regardless of whether you support Obama or not, his campaign finance model is an inspiration and could be easily extended to startups.

    Obama raised 10 million dollars in two days from 2 million individual donors following McCain's Sarah Palin V.P. announcement. Now think of how long it would take a startup to get $10 million. They'd have to spend months giving powerpoint presentations to venture capital groups, and would have to sell their souls to get that kind of money. Direct, "people powered" startup financing could be extremely responsive to new and promising ideas and would distribute risk over a large number of people.
  16. Oct 9, 2008 #15
    That's the problem though. Although investors do in theory have a stake in the company, unless you hold a lot of shares, your individual voice is pretty much meaningless. "Investors" are essentially putting a lot of time and energy into buying and selling complete fictions.

    CEOs don't consult investors about their own pay or "golden parachutes." They don't ask investors what types of products they do or do not approve of etc. You need to be a Warren Buffett level investor before you voice carries any weight.

    Short answer a slightly revised "owner's bond" model. Longer answer, these bonds would have a predefined 9 percent return rate. The modification would be that selling a bond to another investor (say you need the cash for some reason) before term would yield zero penalty. The sale price would follow a simple formula:

    Sell on the first day, get your entire investment back
    Sell half way through the term get your investment + 1/2 the return
    Whoever holds the bond when it comes to term gets paid the full amount by the company.

    That accomplishes everything a stock would, but with far less risk. True, you're never going to get Google level returns under that model, but if we're talking about trying to create an actual growth based healthy economy it would be far more stable.

    Yes and no. It's true that credit would cost more for things like homes (perhaps very long term loans like these could have a lower fixed rate say 4.5 percent or even interest free) but for short term credit, it would actually be a big improvement. If you remove the "investment" aspect to homes and just have non profit loans (say supplied by the government) you would free up a lot of money for actual growth investing.

    Think of how incredibly predatory the credit market is. You miss one payment and wham a credit card company can hike your rate into the 20 percent or even higher. There's no excuse for that crap. Under the model I'm envisioning, the only time a borrower gets a black mark is if they don't pay the loan off at the end of the term. During the payment period, they can adopt any schedule that works for them. Pay weekly, every 3 months, every year, whatever. As long as the loan is paid off at the end, that's good enough. Under that scenario, the borrower would actually have more freedom than the current system.
    Last edited: Oct 9, 2008
  17. Oct 9, 2008 #16
    Because it would be guaranteed. Six years ago, Microsoft was selling in the 70s and 80s. Today, it's in the 20s. So if you retired this year with a big chunk of Microsoft stock, you lost out pruely because the timing wasn't right. With a fixed 9 percent scheme, there would be no timing penalties and you wuld know exactly how much you could count on when you retire.

    As we've seen so dramatically recently, even huge companies can crash and burn in a matter of days. This is no way to run an economy...
  18. Oct 10, 2008 #17


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    That's not investing in a start-up, that's donating. What will the donors have to show for it? If they were given a document showing how much they donated it would represent a portion of ownership. This essentially would be no different than issuing a stock certificate.

    The idea behind the stock market is to allow individuals to invest in a company with the potential for wealth accumulation through their proportion of ownership. The concept is no different than starting your own private company to acquire wealth - except in the private company case you would own the whole company (excluding any other partners).

    By depositing cash into a bank and receiving interest on your funds, you are not acquiring ownership in anything. You are being paid an interest rate for the bank using your money to do business.

    The hope with investing is that your effective rate of return is greater than that of the effective interest rate the bank is giving you.

  19. Oct 10, 2008 #18


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    The CEO's compensation is determined by the Board of Directors. The CEO is also appointed by the Board of Directors. The Board of Directors are elected by the shareholders. Each shareholder has 1 vote, hence, he who has the most shares has the most votes. So, yes, the CEO is compensated by the investors.

    Not necessarily, you would just need a majority of investors who have the same "voice" as you.

  20. Oct 10, 2008 #19


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    If the bank is paying you 9% to use your money, then they will be charging you ~15% to loan money to you for a house/college/car/whatever. There is no net gain in this model. The 8-10% average long term gains in the stock market can still exist with the bank paying you 2% and charging you 6% for your loan.

    Big companies go under with little impact on the economy as a whole. The problem we are experiencing is due to the too many big companies failing at the same time, plus the fact that we were already in a recession. If anything you should be saying "this is no way to run a company".

  21. Oct 10, 2008 #20
    The problem is: This has been how to run a company for a long time (spend and lend what you don't have), and our government is the same way. Pretty scary.

    Anyone else see the dollar going up a lot (due to deflation) and the costs of good/services coming down?
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