helicopter34234
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- Joined
- Sep 7, 2008
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I just started trading stocks (I know, great timing) and therefore I am trying to learn everything I can about how the market works.
First, aside form the IPO and the rare occurances when a company floats additional shares of stock (or the even rarer event a company will buy back some of their shares), all of the trading in the market is essentially in the secondary market (individual investor trading with another individual investor, not the company itself). So aside from these occurances it seems like there is a hard wall between the company and the secondary market where money does not flow into the company from the market and money does not flow out of the company into the secondary market. So lets say we are in the midst of a bubble and the price of a stock is skyrocketing, the company itself doesn't appear to benefit at all from these soaring stock prices (other than how it reflects on the image of the company or if they float more stocks). They get no additional money because their stock price tripled. Likewise lets say we are in the midst of a stock market panic (which we are) and the price of a stock goes almost to zero, why exactly should the company itself care other than the fact that it reflects on their image and it is unlikely they will be able to float any more shares until the price recovers. I mean, they got their money from the IPO at a decent rate, they have this money, what do they care that johny stock market investor is holding this stock and can't find a decent buyer, not their problem. Where is the flaw in my logic? Lets say our company is doing really crappy and their earnings are really bad, this doesn't really affect the stock holder other than the fact that he will have a hard time trying to sell it for a good price. It almost appears like a conundrum that the value of a stock is only set by what someone else in the secondary market will want to pay for it. Lets say I own stock in a really great company but for some reason noone wants to buy it from me, is my equity ownership valueless? How could it be, I own a portion of a company that is doing really well. Some of you probably would retort that its not valueless because eventually investors will realize the company is good and want to pay you good money for your stock. For those of you thinking this, you are missing my point I am trying to illustrate. Something doesn't just have value because people will pay you money for it, it has to have some intrinsic value to. A car has value cause you can drive it, not just because someone would buy it from you. Land has value because someone can build something on it, not just some day someone would buy it from you. Lets imagine a situation, we have a company which is likely not going to go out of business or be bought out for at least 200 years (therefore your stock will not be bought out nor will you receive cash for the liquid of assets on bankruptcy, also no dividends) and you own stock in this company. Lets say all of a sudden no one wants to buy your stock and for some unknown reason noone will ever want to buy it from you again on the secondary market, is your stock all of sudden worthless. How could it be, you own a portion of the company.
I know what I am have said may sound ridiculous or simplistic but I believe there is some subtly here. It goes into the nature of how you value a stock. The stock market is dominated by psychology, investors panic or becoming overly heated and cause bubbles. Good investors are supposed to asses intrinsic value in stocks and only purchase them when they are priced around their intrinsic value. But how can a stock have intrinsic value if they are only valued on sale to another investor who he then can only get value on another sale, and so on.
Ok, my second question... I notice that when I graph some of my stocks with the NASDAQ or the Dow that my stocks will very closely track these indices. The tracking is very distinctive over the short term, maybe a couple of days but if you graph both on a longer time scale the correlation just isn't really there as strong at all. Essentially you are noticing that the "noise" in these stock prices are well correlated. Now this may be obvious for a stock that is a heavily weighted part of the index, but even stocks that are completely unrelated to the index will have this correlation. The less related to the index the stock is the less it correlates over longer time scales, but it is almost uncanny how closely the noise correlates. Now I don't know if this is just specific to the current state of events (high volatillity with investors hanging on every piece of news) but I think its very interesting. Like you may see it rise for a few hours, then all of a sudden drop at a particular hour. Are most investors really that informed that hour by hour they are finding out information about the company and deciding all collectively sell (or buy). I am no where near this well informed, I check my stock periodically through the day but I don't read press releases or articles on whats going on constantly throughout my day to be a member of this coordinated buying and selling.
First, aside form the IPO and the rare occurances when a company floats additional shares of stock (or the even rarer event a company will buy back some of their shares), all of the trading in the market is essentially in the secondary market (individual investor trading with another individual investor, not the company itself). So aside from these occurances it seems like there is a hard wall between the company and the secondary market where money does not flow into the company from the market and money does not flow out of the company into the secondary market. So lets say we are in the midst of a bubble and the price of a stock is skyrocketing, the company itself doesn't appear to benefit at all from these soaring stock prices (other than how it reflects on the image of the company or if they float more stocks). They get no additional money because their stock price tripled. Likewise lets say we are in the midst of a stock market panic (which we are) and the price of a stock goes almost to zero, why exactly should the company itself care other than the fact that it reflects on their image and it is unlikely they will be able to float any more shares until the price recovers. I mean, they got their money from the IPO at a decent rate, they have this money, what do they care that johny stock market investor is holding this stock and can't find a decent buyer, not their problem. Where is the flaw in my logic? Lets say our company is doing really crappy and their earnings are really bad, this doesn't really affect the stock holder other than the fact that he will have a hard time trying to sell it for a good price. It almost appears like a conundrum that the value of a stock is only set by what someone else in the secondary market will want to pay for it. Lets say I own stock in a really great company but for some reason noone wants to buy it from me, is my equity ownership valueless? How could it be, I own a portion of a company that is doing really well. Some of you probably would retort that its not valueless because eventually investors will realize the company is good and want to pay you good money for your stock. For those of you thinking this, you are missing my point I am trying to illustrate. Something doesn't just have value because people will pay you money for it, it has to have some intrinsic value to. A car has value cause you can drive it, not just because someone would buy it from you. Land has value because someone can build something on it, not just some day someone would buy it from you. Lets imagine a situation, we have a company which is likely not going to go out of business or be bought out for at least 200 years (therefore your stock will not be bought out nor will you receive cash for the liquid of assets on bankruptcy, also no dividends) and you own stock in this company. Lets say all of a sudden no one wants to buy your stock and for some unknown reason noone will ever want to buy it from you again on the secondary market, is your stock all of sudden worthless. How could it be, you own a portion of the company.
I know what I am have said may sound ridiculous or simplistic but I believe there is some subtly here. It goes into the nature of how you value a stock. The stock market is dominated by psychology, investors panic or becoming overly heated and cause bubbles. Good investors are supposed to asses intrinsic value in stocks and only purchase them when they are priced around their intrinsic value. But how can a stock have intrinsic value if they are only valued on sale to another investor who he then can only get value on another sale, and so on.
Ok, my second question... I notice that when I graph some of my stocks with the NASDAQ or the Dow that my stocks will very closely track these indices. The tracking is very distinctive over the short term, maybe a couple of days but if you graph both on a longer time scale the correlation just isn't really there as strong at all. Essentially you are noticing that the "noise" in these stock prices are well correlated. Now this may be obvious for a stock that is a heavily weighted part of the index, but even stocks that are completely unrelated to the index will have this correlation. The less related to the index the stock is the less it correlates over longer time scales, but it is almost uncanny how closely the noise correlates. Now I don't know if this is just specific to the current state of events (high volatillity with investors hanging on every piece of news) but I think its very interesting. Like you may see it rise for a few hours, then all of a sudden drop at a particular hour. Are most investors really that informed that hour by hour they are finding out information about the company and deciding all collectively sell (or buy). I am no where near this well informed, I check my stock periodically through the day but I don't read press releases or articles on whats going on constantly throughout my day to be a member of this coordinated buying and selling.