Dow Jones Cashed in Today

[ewmayer]

Originally Posted by VBCurtis

No. At its core, stocks are ownership stakes in companies; dividends are the portion of profits paid out to shareholders. Say you buy shares of AMD, and next year they make double the profits compared to this year. In some sense, the company is now worth twice what it was last year, because it is twice as profitable, so the stock *might* double. I say "might" because share prices are determined by what buyers and sellers agree on, not a fixed multiple of profits. Still, whatever increase in stock price that comes from a company's increased profitably does not cause someone else to lose money.

But wait a minute - you have to go further down (or is it up?) the monetary food chain and ask, where does the actual money which rewards a profitable corporation such as you cite come from? Say the stock market doubles in 5 years - does that imply there is double the money supply supporting said valuation? No, not even close. Valuation bubbles such as popped in 2008 and (ongoing) now are invariably driven mostly by some form of leverage, as in, borrowed money, and investor optimism - the latter is important because of the inherent bias in the equity markets, that the current share price is set by the most optimistic investor. And with companies having exploited the Fed's perma-ZIRP policies to borrow vast sums at nearly 0% in form of corporate bond issuance in order to fuel a wave of share buybacks which drive up their own share price (note this used to be illegal, now it's the most popular sprot on Wall Street), richly rewarding their executives (whose compensation has in recent decades become overwhelmingyl tied to share price) and at the same time shrinking the "float" (number of shares trading publicly), it takes ever-fewer optimistic investors to goose those share prices. To use a Main Street analogy: say you live in some neighborhood of 100 homes, whose prices have been in some fairly well-established range in recent years. Then, some speculator with money - possibly borrowed - decides there's oil in them thar hills surrounding the 'hood, buys one of the homes for double the expected valuation. Voilà! Every home in the 'hood suddenly doubles in expected valuation. Where did all that new "wealth" come from? Does it reflect any kind of fundamental economic value-add? Only if there really does prove to be oil in them thar hills.

Originally Posted by Uncwilly

Are laws in place there that allow for American style credit unions? Or 'community' banks? They can have better physical service. And if they tie into the right systems provide big bank avaialablity.

What's really needed - and also here in the US - is a universal postal savings bank. But the for-profit bank lobby is too strong.

[Uncwilly]

Originally Posted by ewmayer

What's really needed - and also here in the US - is a universal postal savings bank. But the for-profit bank lobby is too strong.

Keep your grubby goberment paws off my money.

[Dr Sardonicus]

03/09/20 close 23,851.02 -2,013.76 (-7.79%)

03/10/20 close 25,018.16 +1,167.14 (+4.89%)

03/11/20 close 23,553.22 -1,464.94 (-5.86%)

[Uncwilly]

Here is a view of the % day to day change in the Dow for the last ~6 months

[Dr Sardonicus]

Originally Posted by Uncwilly

Here is a view of the % day to day change in the Dow for the last ~6 months

Finally -- some signs of life!

[PhilF]

Originally Posted by Dr Sardonicus

Finally -- some signs of life!

Yeah -- that's some heartbeat, doctor.

[CRGreathouse]

Originally Posted by Xyzzy

Is the stock market a situation where if somebody makes money that means somebody else has to lose money?

Not in general, but transactions where you buy stock from another stockholder or sell stock to another stockholder are indeed zero-sum (excluding tax considerations). But when you buy a share of stock in a company and that share becomes more valuable (or less valuable) over time, that's non-zero-sum.

If you own one share of a company worth $1, and over 10 years the company doubles in value, your share is now worth $2. This is a real increase, and it's not zero-sum -- no one had to lose money. Similarly, if the company's factory burns down and it's now bankrupt, your share is worth $0, and this is a real decrease: no one gained your $2.

[ewmayer]

Originally Posted by CRGreathouse

If you own one share of a company worth $1, and over 10 years the company doubles in value, your share is now worth $2. This is a real increase, and it's not zero-sum -- no one had to lose money.

Unless said share price increase was driven by debt-fueled share buybacks, in which case today's share price increase comes at the expense of more debt on the company balance sheet and, typically, investment in R&D and real productivity increasers.

[VBCurtis]

It's not helpful to bring up financial engineering to confuse the concept of stock ownership. It's a bit like arguing with someone explaining multiplication by constantly saying "that's not the answer in base 8!!!" While a valid claim, it's not doing anything to clarify the concept of whether share ownership is a zero-sum game.

There are plenty of companies out there not engaging in financial engineering, share buybacks, etc. Pretend we're discussing how share prices work for one of those comanies, K?

Also, thanks for reminding me why I usually avoid posting in the lounge.

[CRGreathouse]

Originally Posted by ewmayer

Unless said share price increase was driven by debt-fueled share buybacks, in which case today's share price increase comes at the expense of more debt on the company balance sheet and, typically, investment in R&D and real productivity increasers.

We're not nearly at that level here. But if you're interested, the Modigliani-Miller theorem does show why it can be beneficial for companies to take on debt to buy back stock (hint: the conditions of the theorem are not satisfied!).

[xilman]

Originally Posted by Uncwilly

Here is a view of the % day to day change in the Dow for the last ~6 months

Looks like the first stages of an earthquake.

Is it going to be The Big One?