Error abounds in all entrepreneurial activity. If there was no error, that would imply no uncertainty, which would mean no profit/loss, which would mean no entrepreneurship. The Fed aggravates that error. But erroneous entrepreneurship is entrepreneurship still. Stock traders TRY to make investments in the hopes of making a profit, and they do so with real potentially productive capital. The stakes are entirely different than with gambling. If investors “win”, that means they have directed capital in a propitious way, and consumers win too. If they “lose”, that means they have directed capital in a non-propitious way, and consumers lose too. That is simply not the case with gambling. Fed-induced errors or no, stock trading is a fundamentally different endeavor from gambling.
I believe you, but this doesn’t render Lilburne’s point moot. Someone who invests in the stock market directly speeds up the accumulation of capital by increasing the supply of loanable funds by virtue of buying a stock. Someone who bets on a sporting event does no such thing.
You will love it. It is a great story, beautifully told.
I want to read more of his works, but there is so much to read and so little time.
Fellow gamblers and spectators also benefit from gambling… the poker player needs others willing to join in, the horse bettor needs other bettors to take his bets, and so on. The ESPN-ish channels regularly feature Poker and other gambling competitions which produce real entertainment value to viewers.
Clayton -
I think a distinction needs to be made between the people who buy up the original shares when a company first sells them, and people who do secondary deals. When people buy the original shares, their money can be considered an investment in the company. The money goes to the company and can go towards buying new equipment. But people who buy “second hand” shares are not contributing anything at all towards the company (are they?). I don’t see how they can be classed as “investors” - because the “investment” has already taken place.
“v. in·vest·ed, in·vest·ing, in·vests. v.tr. 1. To commit (money or capital) in order to gain a financial return”
The person who sells a stock divests, and then is no longer an investor. The person who then owns the investment now is the one who has money committed. He is now the investor.
True, but the system is not really working in the way one might hope. Say that a rich and clever man thinks that the product that company X has just invented is going to do really well in the future. He keenly goes round buying up all the (pre-existing) shares. He has not given company X any money. Company X is not able to produce any more of their product by virtue of the wealth or insight of the rich man. How has the rich man contributed anything to the system?
It’s true that the trading of the brokers, individually, might not be to invest in some long-term capital project. It just so happens that the partaking of this type of activity by many people allows the company to have a pool of funds for funding such projects. So no one will buy shares thinking “I’m doing this to fund project X” but rather, are just looking to make a buck. The company allows this activity because it gives them access to funds that allow for direct capital investment.
I don’t understand how. They would have the same funds just as readily if the “rich and clever man” didn’t exist. All that company X desires is someone to buy the shares in the first instance.
U R most velcom, my child [:D]
The guy who buys the shares in the first instance is willing to pay more for them because they can be sold later on.
Yes, it’s a legal gambling.
Care to elaborate?
Indeed true, but the “second hand” share dealing has its downsides. If people borrow in order to buy second hand shares then this makes the market a recipe for ABCT. Additionally, what is the use of people “investing” in shares for fractions of a second? That seems to be a recipe for front-running and other frauds. If there was some in built disincentive for people to own shares for too-short a period, the money that companies could get for their original share sales would be scarcely affected.
Maybe it is, as you envision it.
If it is, then it is still no more or less true for stocks than it is for any other “investment” - including [dare I say it here?] gold/precious metals.
If all of your life savings were "invested "in stocks, then I would agree with you - it is , as you say gambling [since you would be gambling/speculating your precious life savings on an unknown/unknowable future].
But then again, if all of your precious life savings were “invested” in gold, or any other single investment class, it would still be gambling [since you would still be gambling on an unknown/unknowable future.]
The only difference would be the future economic scenario being predicted/gambled on, as obviously, gold and stocks do not do well under the exact same economic conditions.
No. It’s credit expansion that will cause the business cycle.
The trader gets money. Companies may find that allowing this activity can help boost share price. A trader isn’t necessarily an investor in some sense. They don’t contribute to large capital projects as much as they contribute to the shuffling around of capital.
I’m not sure I follow here.
I am assuming the rest of the system is unchanged, in which case borrowing IS credit expansion
How and why should it?
The price people are willing to pay for shares is should be dependent on what dividends they will get. They may also be willing to pay more if they can have some flexibility of ownership. They may only want to invest for a few months or a year and then sell up when they need some cash (over and above the dividend payments). The right to sell is a bonus to them. But who the heck has a strong desire to invest for a day, or an hour of five seconds? If there were some penalty attached to selling in less than a day (say 1%) and a penalty for selling in less than a week (say 0.5%), and a penalty for selling in less than a month (say 0.2%), then that is not going to put people off buying shares to any significant degree. But it would have a dramatic effect on levels of fraud.
Are you just a control freak? Simply looking for excuses to crack down on something you don’t like?
What the hell does it have to do with you if people hold stock for a few seconds? Is it any water off your back?
They have the right to. Thats it. I’m sure they also do something else that is nice, but at the end of the day it’s their right to and the buck stops there.
If the rich man has overvalued the share, then this entrepreneurial error will be revealed when the market discovers it as such, and as a result ,the rich man will suffer losses.
If the share values had absolutely no relation to actual reality then the stock market would render no useful purpose. It would not exist.
You’re basically saying that since the actual money was recruited only upon the initial issuing of the shares, it makes no difference if later on, the value of the share tanks or hits the ceiling . For example. If a desk was bought at $200 with the issuing of a $200 share, it doesn’t matter if the share was later sold for $10 or $500. A $200 desk is still a desk and the same employee may occupy it. Is this correct? If so, do you see the fallacy behind this reasoning?
Very mush so. If the people doing it are very highly paid, and those wages come from the rest of us (that includes me), and there is no benefit to society then I am pissed off.
Please explain the benefit to society of owning shares for 5 seconds.