When securities market goes up, investor fill actual money in it. But when securities market goes down, some investor slowly act to sell stock and withdraw their actual money back. After long period going down, total transaction value decrease. I am not clear where the actual money go in the securities market? It’s ok for overall the economy but money flows in the securities market seem so complicated to me. Could you pls kindly make it clear? Or feel free to laugh if the question so naive Actually, i don’t understand clearly. Thanks a lot.
IMO the question is not naive at all.
Another link with example: http://www.investopedia.com/articles/basics/03/060603.asp
Hi ZeroBonus Thank you very much for your links.
into the pockets of sam israel III
I think that article is BS. Since when is the value of securities like equity including in anyone’s definition of “money”? If the stock market goes up, nobody would say that the money supply went up too. There’s this continuum that starts with cash and goes to stuff that almost certainly has no value and somewhere north of equity is the dividing line between money and valuable property.
If you buy a stock for $100 and it goes down to $50, and assuming the guy that buys it from you paid a market price, your money went to the guy that sold it to you. Maybe that was another investor that saw that the stock was only worth $50 and decided to let you hold the bag. Maybe that was someone who just got a divorce, needed cash, and got out at a lucky time. Maybe that someone was the company whose stock it is, who sold their treasury stock and now spent it on capital improvements or to pay off a bunch of debt. When the stock goes down, the guy that got the $50 you lost was the guy that sold it to you. Maybe they took that $50 and did something dumb with it too, so maybe they don’t have the $50 anymore. Most people don’t think about that, because when they sell a stock for 1/2 of what they bought it for, they aren’t looking back in time to the moment they bought it, but more to what happened since they bought it or when they sold it. – Then there is the question of what makes a stock price go up and down. Basically, there are three things that influence a stock price (though each of the three things have factors that influence them). 1) RESIDUAL OWNERSHIP VALUE. If you sell off the company’s assets, pay all debt, and divide up what’s left over, that’s how much your stock ought to be worth at minimum. Of course, if assets themselves fluctuate a lot in value (like CDOs and MBSs and on financial companies’ balance sheets), that residual ownership value can fluctuate a lot and it doesn’t help you. But if you have something with a lot of fixed assets, maybe it can help. 2) VALUE OF FUTURE CASH FLOWS from owning the stock. Lots of ways to try to compute this value, but it’s basically about how much money you’ll get in the future by buying a stock now, and then discounting it at appropriate rates to reflect time value of money and extra risk because you don’t really know how much is going to come in. This part can break down into cash flows from current business that are reliable, and cash flows that can be expected to come from growth because the company is innovative, has good management, is in a structurally expanding industry, or got lucky with regulation. 3) MULTIPLES EXPANSION/CONTRACTION. This is about people paying more for a stock in Price/Earnings even though the cash flows haven’t changed (or, more realistically, people paying more per dollar of earnings). Although there are fundamental factors that influence multiples (Debt levels, dividend policies, margin growth, etc), a lot of multiples expansion comes from popularity factors - psychological exuberance and despair. Level II talks a lot about “Justifiable Multiples” that come from fundamental factors, and the remainder is presumably due to psychological things. It can be great when multiples expand out of the world - everyone feels they are making lots of money, but eventually one realizes that there is only so much real money in the world and maybe people are just dreaming a little too much about what things are worth. That’s where people can be hit really hard, is when dreams end and reality strikes. What prompts this is probably some kind of liquidity event where - for whatever reason - people suddenly need cash or want to run for the exits ASAP. In practice it can be hard to figure out the exact levels to attribute to each of these factors, but keeping them all in mind as you value stuff is very valuable to make sure you aren’t forgetting something important.
You can decompose a market capitalization (X) in two different parts. One is the amount that was the result of the stock being issued (minus bankers’ fees), which is shareholders’ equity on a firm’s balance sheet, and was actually invested in real assets by the firm (Y). The other part of the market cap is the result of trading in the secondary market (Z). Let’s make that X = Y + Z. Y has been used to pay for real assets. Z, however, is in the pockets of speculators who bought and sold between issuance and now. Funny thing is that while those speculators hold Z in currency, you also have investors who claim to hold Z in stocks. That’s the magic of value creation. Now, Z can also be negative if the original Y invested in real assets is misused by the firm. In this case, instead of having wealthy speculators, you end up with lawsuits, proxy fights, board of directors being wiped clean and whole companies being restructured. The market for corporate control makes sure that Z is usually a positive number… That’s as simple as it can be made. Thu Thuy Wrote: ------------------------------------------------------- > When securities market goes up, investor fill > actual money in it. But when securities market > goes down, some investor slowly act to sell stock > and withdraw their actual money back. After long > period going down, total transaction value > decrease. > > I am not clear where the actual money go in the > securities market? It’s ok for overall the economy > but money flows in the securities market seem so > complicated to me. > > Could you pls kindly make it clear? Or feel free > to laugh if the question so naive > > Actually, i don’t understand clearly. > > Thanks a lot.
Whaaa? None of that is even metaphorically true. Equity originates from all kinds of sources and the connection between equity and hard assets is tenuous. “Funny thing is that while those speculators hold Z in currency, you also have investors who claim to hold Z in stocks.” - huh? There is just no connection at all between currency and equity. If there are a billion shares of stock outstanding but 100 shares of stock trade hands for $1 more than yesterday, the market cap of the company went up by $1B because someone got $100 more for his shares than he paid yesterday.
'ang on a minute - you guys are arguing about money supply and where equity comes from - on a Saturday night - - get outta here - go forth and multiply…!
Sorry Joey, but equity by definition finances something. I refered to real assets. Not sure what you mean by hard assets exactly. Real assets is anything that can be bought and has productive value for a firm. You’re right though that Z units of currency have not been traded. My point is that the difference between the market cap and the original amount of the issuance is simply the result of a consensus and could be any number without any real assets being bought. Now, I kinda have problems with you buddy. Although you seem to be quite knowledgeable on lots of stuff, your lack of humility and excess of arrogance push you make superficial yet rude overstatements like ‘none of that is even metapholrically true’, and make you try to downplay your own errors like the one on the geometric brownian motion, by covering up with elitist excuses like you being too lazy to look up the exact answer in your books. This would probably fool some people who never dealt with people like you before. You’re probably a brillant guy when it comes to maths and physics, but when it comes to social skills you’re a total idiot. The way you try to pick on every detail to prove people wrong - in a very rude manner furthermore - doesn’t make you look more intelligent joey. It just makes it look like you’re missing the big picture. And it also makes shine the fact that you care more about looking smart than enjoying discussions. Everybody knows about the typical physicist/mathematician who aspired to make great things yet failed to make it to Nobel and turned back to something else, picking on other people on their way to prove themselves they are still better than everybody else. We all had at least one frustrated physics/maths professor who behaved like that. You would think that someone like you would be smart enough not to fall in such a pattern, but it seems not. That said, maybe I’m overreacting a bit to your statement, but this is the result of a few discussions with you Joey. Every time it seems to turn into an ego competition and, quite sincerely, it’s becoming increasingly annoying. JoeyDVivre Wrote: ------------------------------------------------------- > Whaaa? > > None of that is even metaphorically true. Equity > originates from all kinds of sources and the > connection between equity and hard assets is > tenuous. “Funny thing is that while those > speculators hold Z in currency, you also have > investors who claim to hold Z in stocks.” - huh? > There is just no connection at all between > currency and equity. If there are a billion > shares of stock outstanding but 100 shares of > stock trade hands for $1 more than yesterday, the > market cap of the company went up by $1B because > someone got $100 more for his shares than he paid > yesterday.