Speculation is a form of arbitrage which moves the market price towards equilibrium, that is, the price which would satiate the needs of the highest degree of market actors, maximize the number of pairs “capable of exchange.” Speculation in the stock market, commodity markets, currency markets, or whatever, is absolutely vital, and strengthens the price mechanism. Unfortunately, when the government manipulates the money supply, and distorts the price mechanism (method of information relay), expectations are altered, and saving leads to the destruction of your wealth (interest rates are far below the rate of inflation). This turns everyone into a speculator, and further distorts the price mechanism based on incorrect expectations. For example, many people bought a lot of AIG and CITI stock when they were below one dollar, which should have been a horrible play. But the government made this stupid investment extremely profitable.
But you must expect at least some volume of sales. You have some fixed costs?
The purpose of speculation in “non productive” stuff is - calculation of the right price. If price of some good is expected to rise or fall in the future, price of that good must come near that expected price as soon as possible (expected future and today’s price are linked). The profit is made by the people who guessed the rate price.
People will say that speculator that buys oil in expectation of big storm that can disturb oil transport is greedy. However, he is doing a favor to the economy. It’s not always clear at the first moment what is good.
Production doesn’t deserve this elevated status. Productions, services, and arbitrage are all needed and serve a purpose, which is why they can be remunerative. This whole “doesn’t produce anything” nonsense is a remnant of classical economics where production was thought to “create value.”
Is there any difference whatsoever in their conclusions? Is it simply the case that the Austrians work out what should be done in theory and the libertarians attempt to put it in to practice?
On the contrary. Speculation doesn’t deserve elevated status. Profit based purely on speculation is pure gambling, nothing else.
The “right price” is settled between me and my customer. If I set price to high in my offer he will not accept it and we will have to bargain again. I don’t see any reason for speculation of some trader between me and my customer.
Well yes. And that is by definition gambling.
In your mind, what is the difference between speculation and gambling?
Do you still disagree with the subjective theory of value?
When someone puts forth capital to become an entrepreneur they are undertaking risk. They believe that they can use that capital and some labor to obtain a profit. There is no guarantee for profit. When they do this, nevertheless, they do not rely on random chance. They understand the market and are guided by “the invisible hand”.
I think this may be an important distinction.
So by this logic, only underwriters+investment bank would be considered investors? Correct me if I am wrong, but does not the underwriter+investment purchase all of company A’s stock, and resells them to other investors? The only money the company A sees is the original investment from the underwriter+investment bank. A raise in stock price does not mean the company itself gets more capital, just that the value of their stock is higher.
It’s an unimportant distinction. Some people buy and hold for years. The company will have a larger pool of money to draw from because the fact. That is also an investment.
There is no point in buying shares in IPO if you cannot sell it later. Buying shares is risky business. There are people with ideas that will not qualify for the bank credit. There are people with money willing to risk it for a good profit. The later provide money for the former. They get out and search for another opportunity (someone with great idea, but not enough money).
However, since money and credit were abundant recently, that thing died a bit. Instead, taxpayers will hold the risk and will earn no profit in return. That’s capitalism in reverse.
You can also look at it as a gambling. The one who provides capital for risky ventures is betting the market he is right.
This is not true. You will get the benefit of dividends throughout the life of the company. The flexibility to sell the shares is a plus point, but the only reason you will be able to sell them is because other people know that they can then get the benefit of the dividends. Ultimately the only value of shares is the dividend payments. The day that people know that no more dividend payments will be made on a share is the day that the share becomes worth exactly zero.
EDIT: I may have to retract that last sentence - maybe if a company gets liquidated then there may be a chance of getting a share of the sale price of the company assets - I’m not sure.
Not if the company does not issues dividends.
Not necessarily true. Voting stock brings control of the capitalization of the company, and there are all sorts of reasons to pursue that.
Bingo.
Explain to me the value of a company share when they don’t issue dividends.
Could you give an example?
Bingo? You say that excitedly, like you’ve discovered some major component of the value of shares. But liquidating the company only happens after everything has gone disastrously wrong. Usually when a company goes belly up the creditors get next to nothing.
I rather like this (rather long) lecture by Prof. Robert Shiller on the value of shares. In it he states that the value of shares is essentially tied to expected future dividend payments and pretty much nothing else: http://oyc.yale.edu/economics/financial-markets/content/sessions/session-11-stocks
I own 100% (100 shares out of a 100 total) of a hot-dog stand company (HDSC) comprised of $10k cash (in an HDSC bank account) and a hot-dog stand. I don’t intend to make any hot-dogs, so no future sales, profits, and dividends are pending. I’m selling my 100 shares of HDSC. How much are you willing to offer for those shares?
You keep using “company” and “shareholders” as two separate entities. The company IS the shareholders (investors), and nothing BUT a “company” of them.
Z.
I just did. You quoted it.
Purchasing shares to takeover a firm. To force a merger. To encourage the firm to pursue certain markets or models. The possibilities are endless. It’s like asking people why they would buy anything. Every individual sees different manners and magnitudes of utility in their purchases.
No, I said Bingo!, like I am pleased beyond imagination that you figured out something sensible. Bingo! You win!
Not at all. Liquidation can happen because the sum of the company’s parts are worth more than the sum of its whole. That doesn’t mean something is disasterously wrong, that just means that the situation has changed and the capital allocation needs to adjust.
If you support the notion of markets (and it is almost impossible not to) then you have to understand that capital reallocation, recessions, falling prices are all mechanisms of market re-balancing. Without them, markets would be static until we have a real disaster.
Don’t consumers win either way? The loss of the speculator simply reveals that his predictions about where consumers’ preferences are directed were wrong, correct?
I think I addressed this in another thread, but the bidding up of the stock price allows for further access to capital, with any further stock floats (assuming some is still privately owned) gaining more for the company for any given level of stock, and the increased value of the company making it appear as a safer bet for banks and/or those looking to buy bonds from the company.
And we aren’t competing for the goods with A. Look at it in terms of money or resources, ultimately the only people paying are those who buy and sell shares to the traders.
Only person A isn’t impartial, as he values a red apple over a green one due to his expectations that he will be able to trade with person C if he has the red apple.
As far as I’m aware, as an Austrian economist one can only speak of what will happen i.e. price controls will result in shortages or surpluses. After this stage it is up for individuals to use their own values to establish what should be done, which may seem obvious, but whereas most Austrians would say price controls should be abolished as they result in disutility to people and they believe this should be avoided, one could just as easily be an Austrian and a Nazi, advocating heavy price controls in, say, Israel.
No, because his incorrect predictions resulted in capital being directed in a way which didn’t satisfy their preferences, essentially wasting capital which could have benefited them.
It is nothing like gambling.
Actually the stock market is a very efficient market.
There have been studies done using historical data that show that usually the stock value 10 years ago is roughly the book value of the company today.
There are of-course a lot of distortions (some years it may not be true because of bubbles and some companies are more difficult to value then others) but it holds up surprisingly well.
The important point is that there is any correlation between future real assets and current stock prices and there most certainly is. That means that the market works and it is better at estimating the future value of a company then a dice. Thus if you are good at business guessing you can make a lot of money in the stock market and you can effectively reduce risk by obtaining more information. In a lottery the amount of information you have about now is of no use to your chances of winning in the stock market information about current conditions along with an understanding of how business work is key.
If you trade in a very short-term or with other instruments like forex it is different information that matters but it is still not really gambling.
There is one aspect of the stock market that perhaps can be considered gambling, that would be bubbles. They are sort of a ponzi lottery where you can gamble on when it will end. But then you are not using your own assessment of the actual potential of the company, but rather you use your assessment of other second-hand investor’s assessments … which is retarded.