The Stock Market

[tigerroar]

It's all a game isn't it?

What would happen if there wasn't a stock market?

 

[yorksrob]

The original purpose of the stock market was to raise money to invest in British industry.

I'm not sure how much of that it does nowadays !

 

[gswindale]

There would be no publicly owned companies - they'd all be private wouldn't they.

Part of your pension would disappear down the drain at a rough guess.

 

[najaB]

It's all a game isn't it?

Some people treat it as a game, but it really is a lot of good done by allowing companies to raise capital in exchange for giving people a share in the company.

What would happen if there wasn't a stock market?

It would be much harder for companies to raise capital, meaning that they wouldn't be able to develop new products, expand into new markets, employ new people, etc.

The original purpose of the stock market was to raise money to invest in British industry.

I'm not sure how much of that it does nowadays !

Quite a lot. Every time there's a share offering (either an IPO or a new issue) then the company gets a fresh injection of capital.

 

[Cloud Strife]

I have to admit that there seems to be no real correlation between share prices and the value of the company. My PKN Orlen shares (Polish oil company) have tanked by nearly 30% recently, yet the underlying finances are incredibly strong. As it stands, I'm just about to pull the trigger on another large purchase of shares, because the dividend will likely be more than 5% of the purchase price!

 

[Magdalia]

The original purpose of the stock market was to raise money to invest in British industry.

I'm not sure how much of that it does nowadays !

That was the original purpose of the stock market, and I can remember when it was one of the foundations of a capitalist economy. Companies raised finance for investment by issuing new shares, either through a flotation (privately owned companies "going public") or through a rights issue, where new shares were issued. These were called rights issues because the existing shareholders had the right, but not the obligation, to acquire new shares to retain their percentage shareholding in the company. In those days companies generally didn't go into debt, by borrowing from banks or by issuing bonds, to finance investment.

That all changed with financial deregulation in the 1980s. Now most companies finance investment with debt. Rights issues are almost non-existent. Flotations are mainly for the benefit of entrepreneurs, enabling them to realise the value of their companies, or, in the case of privatisations, an opportunity for the government to raise finance by selling assets. And private equity is now a big thing, in effect the reverse of a flotation, where investors buy up all of the shares in a company and take it off the stock market.

It's all a game isn't it?

There's still a lot of companies with shares quoted on the stock market. Secondary trading in those shares is partly about investment for the long term by pension funds, insurance companies and other investors all around the world. But, since technology has allowed the development of more and more complicated derivative transactions, it has been overlaid by what is, in effect, a very big gambling game.

 

[yorksrob]

Personally I think that there's too much buying and selling of companies, particularly with debt that is then piled onto the bought company.

I'd like to see that side of the stock market clamped down upon hard.

 

[Yew]

There's still a lot of companies with shares quoted on the stock market. Secondary trading in those shares is partly about investment for the long term by pension funds, insurance companies and other investors all around the world. But, since technology has allowed the development of more and more complicated derivative transactions, it has been overlaid by what is, in effect, a very big gambling game.

I must admit that I'm increasingly of the view that the derivatives market is starting to do more harm than good.

 

[brad465]

There's still a lot of companies with shares quoted on the stock market. Secondary trading in those shares is partly about investment for the long term by pension funds, insurance companies and other investors all around the world. But, since technology has allowed the development of more and more complicated derivative transactions, it has been overlaid by what is, in effect, a very big gambling game.

I must admit that I'm increasingly of the view that the derivatives market is starting to do more harm than good.

The stock markets are also among those that have been hugely inflated by all this "pretend money" that Central Banks have been printing. This is evident in particular during 2020, where after initial concerns about covid's economic impact caused them to tank, they then shot up to in most cases exceed their pre-covid levels, with tech stocks in particular benefitting, when The Fed in particular printed 80% of US dollars in existence. What will be interesting to see is how they react to any "Quantitative tightening", if actually deployed significantly.

 

[Yew]

The stock markets are also among those that have been hugely inflated by all this "pretend money" that Central Banks have been printing. This is evident in particular during 2020, where after initial concerns about covid's economic impact caused them to tank, they then shot up to in most cases exceed their pre-covid levels, with tech stocks in particular benefitting, when The Fed in particular printed 80% of US dollars in existence. What will be interesting to see is how they react to any "Quantitative tightening", if actually deployed significantly.

I'm not certain that was what I was getting at, we've increasingly seen investment capital pumped into the derivatives market, that doesn't actually produce anything, or add to the economy, but still takes money out of it and into the pockets of wealthy investors. (And before anyone says "but pensions", these are options and futures, which push up prices)

It's time to bring in significant regulation of derivatives, and for a financial transactions tax on stocks, to discourage automated trading for minuscule gains.

 

[najaB]

It's time to bring in significant regulation of derivatives, and for a financial transactions tax on stocks, to discourage automated trading for minuscule gains.

I agree with the former, but not the latter. For one thing, who decides what counts as 'miniscule gains'?

 

[Yew]

I agree with the former, but not the latter. For one thing, who decides what counts as 'miniscule gains'?

In my mind I was thinking about the occasions where automated trading algorithms will use faster internet infrastructure to "beat" a legitimate purchase, and then sell to the "real" purchaser at increased price.

Either way, high-frequency trading causes significant market volatility, and if we want to continue to trust the markets as judges of value and confidence, I cannot see how such instability inducing mechanisms are tenable.