Comment by lmm | Hacker News Reader

Comment by lmm | Hacker News Reader

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It's worth emphasising that if you just want to invest in a company, modern markets let you do so in an unprecedentedly cheap way: you can usually buy or sell with a penny spread (not legally allowed to be tighter, which is a whole other rant) virtually instantly. If we're really talking about the pure "stock market" then at this point it's pretty much a commodified, low-margin utility business. I'll assume you meant the broader financial industry.

At a simple level: investors might want to invest in a given company at any point on the risk/return curve, rather than just the one their stock or a particular bond issue is set at. They might want to invest in a particular sector rather than having a view on specific companies. They might want to invest in a company whose stocks are priced in a different currency from their own, but without exposing themselves to the currency movements. They might believe a particular sector will outperform the market without wanting to take a view on how the overall market will perform. They might have a big chunk of a commodity to sell in six months and want to spread out the sale according to whenever gets the best price. And all of these views do, ultimately, filter down and translate into concrete capital allocation in the real world: maybe a particular sector ends up hiring more people or building more factories because they have more capital, and the economy does better for everyone when capital is spent in the best way. (Of course it's possible for everyone to be wrong, but the basic idea that averaging out everyone's buying and selling results in our best guess for where the money should go seems sound).

Of course mechanically you end up with a lot of intervening speculators - in between investor A who has a particular set of views about the market and company B that desires capital on particular terms, there might be dozens of intermediaries. But I see that as no different from the way that most real-world transactions are business-to-business - in between you buying a furniture cabinet and the people growing the wood or mining the metal there are dozens of intermediate suppliers, each with their own particular speciality, all adding a little bit of value.

What I see from this is a while bunch of hand waving to say that 'there are a whole bunch of people between you and x business', despite the fact you can directly purchase their shares(which they offered to gain temporary income to make purchases before their cash flow allowed).

I still don't see a reason why these people between you and the business have any useful reason to exist. Unless for gambling, Wich as far as I can tell is what it is. (And I'm not talking about initial investment, I'm talking about people gambling o weather the value will go up or down).

Ontop of all that, what benefit does it provide to the initial company if people are gambling if the value goes up or down by a few percent? That just seems like a different form of book making.

Edit:

You know upon second read, it seems there is so much hand waving to mitigate investor risk, that completely ignores the idea that you are purchasing a piece of a company, that really seems that the entire system is beibg rebuilt to keep certain people making money.

If I want an investor to purchase 20% of my company. For 20% profit, why should any sort of bonds, currency devaluation come into fact.

As far as I see it: you are directly purchasing a portion of my company. That is a share right? If the value goes up, assumably your dividend will increase. Otherwise it will decrease. What the value of my countries dollar happens, has no effect on the percentile of my company.

All I can see is a lot of hand waving to make things different.

Side note: I'd really like to see a logical reason for any of this.

Edit to lostboys: I think the thread is too long and I can't directly respond, my apologies.

Once the business sells a portion to investors, those portions can be resold. This I get, where all the shorting and everything else comes from, makes me wonder about the entire stock system. At what point is it not about the investment about the business, and gambling about how it will go in the future(eg shorting). That and the whole system akin to it, is the part that is making me wonder how it was ever allowed.

I am not sure what you mean by "gambling" in relation to stockmarkets.

Third parties offer services like spreads CDO's and binary bets (which actually are gambling).

Stock markets act as a market i.e. introducing investors to companies that need capital for example my latest buy was an American Investment trust Tetragon with out a stock market how would I be able to invest in them ?

I think it's the layman's "gambling":

If I buy APPL today at X, I hope in 3 days it will be Y so I can sell. That's a gamble.

You can use all forms of analysis and assessment to give you more confidence in the gamble, but it's absolutely a gamble.

Gambling implies a truly random outcome which is why Poker is a game of skill as is arguably horse racing :-)

If you can identify an temporary overhang on a particular share you can make money as the discount narrows as I have done with Witan I also made a lot on Electra private equity as it was targeted by an activist investor and they realised some of their PE investments

>At what point is it not about the investment about the business, and gambling about how it will go in the future(eg shorting).

What, in your mind, is the difference? I think it's a reasonable viewpoint to say that all investment in a business is a speculative bet (ie. gambling) on its future. In that sense, shorting is no different than going long (you just believe it's going the opposite direction and want to express that viewpoint to the rest of the market).

> despite the fact you can directly purchase their shares

Actually, most people could not directly purchase their shares if we didn't have a stock market. Companies in general would be owned only by relatively wealthy people or by other companies. Stock markets allow more ordinary people to share in the profits of companies. They democratize the ownership of the means of production in society.

> (which they offered to gain temporary income to make purchases before their cash flow allowed)

The income raised by stock offerings is not temporary; it is not a loan to be paid back. That capital becomes part of the company. The company might use that to purchase assets that stay part of the company or to buy inventory which it will then sell resulting in getting that money back plus profit.

> Once the business sells a portion to investors, those portions can be resold.

Without a stock market, they could not be resold without great difficulty. Investor A, who wanted to sell his share, perhaps after new management had taken over and was now driving the company into the ground, would have to find other another investor, Investor B, to buy it, and if Investor B didn't want to purchase the exact amount Investor A was selling at a mutually agreeable price, Investor A would have to begin a new search to sell the remainder of his share. This is one way liquity is such a big help.

> making me wonder how it was ever allowed.

The buying and selling of things has never needed to be explicitly allowed; in most modern nations, individuals are free to buy and sell things they own.

> If I want an investor to purchase 20% of my company. For 20% profit, why should any sort of bonds, currency devaluation come into fact.

You'd have to find an investor who wanted to purchase 20% of your company, which is quite a big ask in a lot of respects: they'd be very heavily exposed to one single company, their risk requirements would have to align exactly with yours, they would have to be using the same currency as you. Bottom line is, you'd get a pretty poor price - which is why the institutions that end up buying 20% of companies are the big banks who can slice that exposure and find buyers for the different pieces. (Just like if you're trying to source a given component for manufacturing, you may well end up going through a broker and an importer rather than dealing directly with whoever makes that component). If the banks weren't able to give a better price, no-one would sell through them.

> What the value of my countries dollar happens, has no effect on the percentile of my company.

Sure, but if I'm a Japanese pension fund and the value of my investment drops by 5% because the dollar has weakened against the yen, my investors are going to ask me some awkward questions.

> At what point is it not about the investment about the business, and gambling about how it will go in the future(eg shorting).

It is investment: no-one's doing this for fun (well, maybe a few people are, but they're only hurting themselves if so), they're doing it to make money, which means figuring out what's actually valuable. At the end of the day the only money going into the system is business profits, so the only way to make money is to do something that makes more money for the economy (or, sure, you can do zero-sum bets - but that's not a profitable business to be in in the long term).

> That and the whole system akin to it, is the part that is making me wonder how it was ever allowed.

There's no "allow"; it's a free country, you can buy and sell stuff you own. But the reason the markets are active is because they're productive.

I wouldn't buy shares in your company unless I had the legal right to trade and sell those shares to others. When I invest, I'm not just supporting you, I'm supporting me.

Or at least you'd ask for a serious discount to give up those rights.

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