Paper Wealth
True wealth isn't the value of what you own --
it's the ability of what you own to produce.
Let's say you and I start a company, each putting in
$10,000, and getting 1000 shares worth $10 each. Let's say the company buys and
sells stuff, but makes no profit.
Now suppose that I buy 100 of your shares for $11.
You now have $1,100 cash and 900 shares worth a total of $990, for $11,000. I
have negative $1,100, and 1100 shares worth $12,100, also making $11,000. We
made $1,000 each!
But you're sad about me having more shares than me,
so you buy them back at $12. Now I have $10 cash, and each of us has $12,000
worth of stock. Whee!
You can't help but notice that I have more money
than you, because I bought early. So you want to buy another 100 shares. I let
them go at $20, so we're each now worth almost $20,000. Hooray! Our friends
and neighbors, seeing our money piling in, might even start competing for our
shares, making everyone rich.
Welcome to the stock market.
The purpose of the stock market is to provide a
system for companies to raise capital for expansion without borrowing it, and to
provide a convenient method for owners to share ownership and keep track of the
money. But nowadays the market is almost entirely speculation. People buy
stocks based not on the money the stock will produce for them (dividends have
nearly disappeared), but for the future appreciation of the stock -- which is
not necessarily based on anything tangible. Plenty of people have gotten rich
on companies that do nothing but lose money. Doesn't seem like a great
system.
Filed Fri - February 17, 2006, 01:34 PM in
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