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Originally Posted by widebody911
Can someone explain to me again how the stock market as a whole isn't just one big Ponzi scheme?
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Quote:
Originally Posted by BReif61
I'd also like this explanation. One thing has always bothered me about it. When you earn money; where does it come from, and where does it go when you lose it.
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I'll try to give you the basics. Though I will have to admit that the "theory" behind the stock market is not happening in much of today's stock market.
If an entrepreneur has a business idea (either for a completely new business, or for the expansion of an existing business), he may not have the capital required to actually put the business idea into practice.
The entrepreneur could find some source of capital from private investors, or perhaps obtain a business loan from a bank, but often -- for many different reasons -- these sources of capital are not available or not desired.
Selling stock through an "initial public offering" is one option the entrepreneur has to raise capital. Essentially, a lot of people make a small investment -- technically taking an ownership stake in the business -- through the stock offering.
The stock market is
not like a Ponzi scheme since the shares represent ownership of businesses. The stock market provides liquidity to those who have purchased shares -- few would want to partake in initial public offerings if there was no secondary market where the investors could sell their shares at some later point in time.
Over the years, the stock markets have become "standardized" and the methods of raising capital and trading the stock after the initial public offering have become major operations.
The idea behind stock ownership is that
eventually -- and it may be many years down the road -- the shareholders in a company will be able to share in the profits from the company in the form of a dividend payment.
In today's markets -- and this is a problem I've been "ranting" about for years -- there are many people involved in "investing" in the stock market who give little to no thought about the
nature of their investment.
One can see ridiculous valuations in certain stocks -- people will be willing to hold stocks with crazy price-earnings ratios, yet, if they were approached with the same "numbers" from someone looking for a small business investment, they would never consider such an investment.
People will let their expectations run wild when "investing" in the stock market -- looking at it more like a "lottery" where they might "win" rather than looking at it with an analytical business mindset.
The "earning" or "losing" of "money" in the stock market represents changes in what people are willing to buy, or sell certain stocks at.
Too many people look at their stocks as some sort of equivalent to "cash" rather than understanding that their stocks are valued at the
last trade that has taken place in that security. If peoples' views (their views are the "market") changes, their stocks can be valued (through the "bidding" process of the market) at more or less than what they originally paid for the stock.
Changes in "values" of stocks and the businesses underlying them -- or changes in the value of anything -- doesn't represent "money" going or coming, it just represents the "mass conclusions" of the people making up the markets for the trading in those stocks.
Few people understand, that unless they had
sold a stock when it was high, they never really "had" the money the stock was valued at.