Penny Stocks Are Booming, Which Is Good News for Swindlers
nytimes.com
nytimes.com
Fools will always find ways to lose their money. The way the market is regulated now, it is hard for honest people to raise money on the markets (the original purpose of stock markets), but scammers are still there.
If stock markets weren't horribly over-regulated, would the VC industry even need to exist?
Why must every part of the world be regulated into safety for the common man? Stock markets were once powerful tool. With power comes the ability to help, but also hurt one's self greatly.
I couldn't find anything in the article that fits this claim. There are a couple lines that report on what regulators are already doing, but not calling for more.
> If stock markets weren't horribly over-regulated, would the VC industry even need to exist?
Emphatically, yes. The best startups in their early stages do not want thousands of mom&pop cheques and investors to manage, they want a small number of smart money, value-added investors. The need for public investors to have transparency into their investments is in conflict with an early stage startup's need to keep competitive information to themselves.
The idea of value-added investors is pretty silly IMO. On one side, you add value to your team not by investing but by hiring. On the other side, you never want to have to rely on investment and with interest rates as low as they are, loans would almost always be preferable over equity dilution.
Usually the most significant value an investor can add is by making a raise as fast and painless as possible so the founders can get back to building their business. "Smart money" and "value-added" seem like concepts invented by investors to get equity at a better price. Founders should desire to spend as little time possible networking with investors and the maximum time focused on building products, engaging with customers and networking within the industry.
ICOs provided the single best example of why regulation is necessary in decades — a world of fly by night scammers doing whatever it takes to separate people from their money, and a few well inventions but utterly unsuccessful projects. Zero ICOs turned into real successful business. Zero. You can count them on no hands. In exchange for what must be hundreds of billions of dollars worth of investments from the common person. What an utter write off.
Thing is, if you can raise from value added investors with experience and connections, you do. If you can’t you go after people who don’t know better. This leads to massive adverse selection risk - present in JOBS act investing too fwiw.
There’s a long and storied tradition here.
Two actual businesses I can name that started with ICOs and appear to be doing well are Funfair, which does legal regulated gambling over Ethereum state channels, and Monolith, which puts tokens on VISA cards for spending.
Ethereum Tezos Monero ( I think ) BAT (Brave Browser's Token)
There are plenty of others, but these are the ones that came up off the top of my head.
The crowdfunding provisions of the JOBS act are nearly a decade old now, which is the horizon of a typical VC fund. Has there been a single company that has returned well to investors? (Honest question, I haven't looked -- but I've seen some pretty suspicious looking pitches enabled by the act)
> Ideally the best startups would be funded by revenue and bank loans.
This is basically what happened before venture capital. If it were a more efficient way of funding startups, VC would not have emerged as an industry.
The rise of this scam ecosystem is proof that regulation is useful. Maybe there are rare cases of ICOs that were not scams. And maybe some of few remaining and were not utter, complete and predictable failure.
But it was a good demonstration how gullible people are and how evil people will readily exploit it.
This really shouldn't be a surprise to anyone at this point. At least this one didn't create a war or recession. ICOs are innovative the same way other crowd funding initiatives are. It's a way for poorly networked but high quality people to get funding. There will be less scams over time as the people get smarter. It's no different than when radiation was discovered in the early 20th century, irradiated products became all the fad (1). Innovation always brings this risk.
(1) https://www.washingtonpost.com/health/the-lethal-legacy-of-e...
(1) https://www.crowdfundinsider.com/2020/08/165315-115-billion-...
Most ICOs are simply scams and in no way comparable to legitimate investments.
I also don't think it's fair to call all ICOs scams. It's certainly in its wild west phase but provides an alternative funding mechanism.
Let's look at topcoinlist.com. Not the current version, but the one of three years ago.[1] See how the top 5 from early 2018 came out.
- Tripbit - Down to near zero.[2]
- Developeo - No longer listed. "Website not active" as of 2020.[3]
- Proof of Toss - "Coin is inactive"[4]
- BitRewards - Still traded, sort of.[5] Issued at US$0.003, now at US$0.0002, with a daily trading volume of about US$1.
- CoolCousin - "Coin is inactive" [6]
FAIL.
[1] https://web.archive.org/web/20180403121628/https://topicolis...
[2] https://ih.advfn.com/crypto/TripBit-TBT
[3] https://icomarks.com/ico/developeo
[4] https://www.coingecko.com/en/coins/proof-of-toss
- Funfair: down about 95% from peak.[2]
- Brave basic attention token - actually went up.
- Augur - down about 70% from peak.
- Maker/DAI is a sort-of-stable coin. [4] DAI is supposed to be stable with respect to dollars, but is backed by Etherium and the right to dilute Maker coins. So Maker holders are subordinate creditors. Unclear how that will hold up in a downturn. Interesting, though.
- Filecoin has been going way up lately, with institutional backing. That's interesting and needs further attention. It's a scheme for trading disk storage capacity.
- Chainlink has gone way up. Although the system for actually storing files is only in beta, and hasn't been priced yet.
- Cardano - way up at the ICO, then way down for three years, now back up to slightly above the ICO peak. This is a proof of stake system.
- Etherium - big peak in 2017, crashed to about 15% of peak, now back up.
[1] https://coinmarketcap.com/currencies/monolith/
[2] https://icomarks.com/ico/funfair
[3] https://www.coinbase.com/price/basic-attention-token
[4] https://coinmarketcap.com/currencies/augur/
[5] https://coinmarketcap.com/currencies/multi-collateral-dai/
[6] https://www.msn.com/en-us/news/technology/what-is-filecoin-a...
The only way Ethereum ICO investors could have lost money is if they bought over 43 cents, and sold when it dipped down to that point several months after launch.
Consider also that bank loans require that you make frequent structured payments with interest. That simply doesn’t apply to venture backed investments. Nobody ever got anywhere at a bank by taking risk. The role of the VCs is to provide the right level of risk tolerance on their capital.
> I also don't think it's fair to call all ICOs scams. It's certainly in its wild west phase but provides an alternative funding mechanism.
Usually switching out of the wild west phase is marked by regulation.
I don't have any issue with the idea of VCs and generally I think they're better aligned than private equity. The big point is not to value smart vs dumb money. Just take the best deal and use the money you saved to hire someone. No amount of "smart" is worth even an extra 0.5% on the cap table. When comparing VCs, I'd like to safe vs dangerous instead. Does a VC have a reputation of creating problems for founders or giving them space even if things aren't going well? That's way more of a consideration than if a VC has better intros or a smarter team.
I respectfully disagree. Your equity is worthless until it’s worth something. That 0.5% could be the difference between a unicorn and a bankruptcy. I would counter with: don’t over value your equity. Don’t make stupid decisions of course but don’t let 0.5% be the reason you fail.
The company I work at is VC funded. It would have folded if it was run by the original founders. At ~200m valuation it started stagnating. A member of the board that was on a VC seat found a consultant who came in as a strategy officer at first. He was able to turn the company around, made it possible for original founders to step away and became the new CEO in about 1 year. The company became a unicorn +-1.5 years ago.
After seeing this I prefer smart money very strongly.
Let's also actually analyze the economics of this success case to show how it's still silly. Let's say the VC got a 15% discount for being smart(1). Let's say the VC owns 20% of the company. At a $200M valuation, the founders paid $6M to get smart investors as opposed to dumb money. For this $6M, they got an introduction at a pivotal point in the company. The salary of the COO of Yelp is $3.3M year (2) and most of that was stock compensation. For $6M, you could have your choice of COOs from top tech companies. IMO, that $6M could've been spent much more efficiently.
(1) This is a big assumption and you can play around with the numbers but if "smart" money doesn't get a better valuation than dumb money, there's no value to being a smart investor and the extra effort wouldn't make it worth it. 15% is also pretty conservative as you can feel free to look at the difference in VC valued companies vs how Sovereign Wealth Funds valued them.
(2) https://www1.salary.com/Jed-Nachman-Salary-Bonus-Stock-Optio...
Our company checks with people working in the org to see if we want to take money from particular investors. We have rejected investors in the past because the values of the investors were different from ours. We take money from investors that we can align on the mission. I mean, there are so many more criteria than money - values, mission, control of the company (are we free to run the company as we like?), preference treatment (how much preference you give VC's on their stock? How much are you willing to reduce the risk of the investor by taking their terms?). We used to value such things and we continue to do so. I'm happy we paid a premium and would do so again.
I look at it the other way round - if you compromise on values / mission / control / other things that are important to you and people in the organisation - you can get more money.
I mean, but how did we get into a hole if we took all this smart VC money? We followed some of their advice (as well as our own misguided ideas). If we failed back then, we would have been just another company "destroyed by smart VC's".
We are looking at a bank loan to fund the factory and growth. They sell products that cost $5 per metre and sells at $500 per metre.
Bank loans are under used in startups but every company is different.
That is probably true, but that's also the only option startups have during their early stages, so there's nothing to compare it to.
This is a factual claim, but your response is not to say that the NYT has the facts wrong, but instead to imply they shouldn't report on facts and imply they have a secret agenda for doing so.
> But last month, there were 1.9 trillion transactions on O.T.C. markets, an increase of more than 2,000 percent from a year earlier, according to data from the Financial Industry Regulatory Authority, a self-regulatory group that oversees brokerage firms.
And
> A 2017 paper from Thomas Renault, a finance professor at the University Paris 1 Panthéon-Sorbonne, analyzed millions of Twitter messages about low-priced stocks. A surge in tweets about a small stock led to big price increases followed by sudden collapses, he found, saying the pattern was consistent with pump-and-dump schemes.
Granted, the rest of the article is mostly quotes from ex-SEC regulators, investors, economists, Jordan Belfort; anecdotes about a few OTC stock scams; and an explanation of what pump and dump schemes are.
But this whole discussion is oversimplifying the article, assigning motives where there doesn't seem to be one.
The SEC is chronically underfunded. A compelling anecdote in the press isn't an uncommon way for an investigation to start. In that light, this article is an expression of a hypothesis.
Yes, that's exactly what I said. However, the article doesn't make any such claim.
Or maybe I missed it, because it was "implicit". What frequency or magnitude of fraud was claimed by the article? "A lot" doesn't cut it. That can mean anything to anyone.
The editorializing agenda is right there in the title. This isn't news it's propaganda and as usual the NYT lies through omission. Please name one reason the state lotto is ok but investing in penny stocks is not. You don't see any NYT articles about that though.
OP: Penny stocks are rife with fraud and reward swindlers
Your article: This one instance of state lotto had fraud. No comment on the lotto in general.
Tax evasion alone looks like a continuous game of cat and mouse. Where governments are always playing catch up as less ethical legislators slip more loopholes and pork into incomprehensively large budget proposals.
I haven't read the whole report, but this was studied in 2005[1] and they had to add a "Family Credit" (basically a UBI) of 500-1000$ per month to balance it out, and recovered approximately 65% of individual and corporate income taxes.
1. https://govinfo.library.unt.edu/taxreformpanel/final-report/...
High sales tax on all “new” products. None on used. A check to everyone each month so that poor don’t suffer from it.
Basically eliminates the IRS, and much of the Tax compliance / avoidance industry. Stops a lot of the tax nonsense that corporations and congress loves.
Tariffs are already used a lot.
If you polled the top brackets I think you'll find that they are more than happy to continue with our current tax system.
A great portion of my taxes goes to military and police. Wouldn’t they just collect the money push come to shove? They certainly have the capability, but possibly not the will.
As income taxes rise there’s a clear pattern of altered compensation like stock grants, expense accounts, etc.
For example, a company can lease an apartment for you to live in. That expense is a write off and isn’t subject to FICA taxes.
Instead of giving you $40,000 in cash which would cost 30% in FICA between you and the company plus personal income tax to you, you can live in a nice $3500/mo apartment you would otherwise be paying for in after tax dollars.
Instead of you paying $800/month+ for a Tesla model X lease with your after tax dollars the company can pay for it, write it off, and again they’re saving 15% on taxes and you’re saving > 40% on that $10,000 and pocketing more of your after tax income.
I'm not an accountant or a tax lawyer, but it doesn't look like that's the case according to the IRS's website. Housing is only exempt if it's "Lodging on your business premises"[1]. A tesla would also likely not be exempt for a typical office worker[2]
[1] https://www.irs.gov/publications/p15b#en_US_2021_publink1000...
[2] https://www.irs.gov/publications/p15b#en_US_2021_publink1000...
Very simplified version: we can spend up to $1k/yr on fitness related expenses and get them reimbursement. We submit a reimbursement request, and if it gets approved, I get the money back in my account. The HR page explicitly warns that any reimbursement received will count towards your income tax.
Average people in the US need to know an obscene amount just to walk the minefield, while inflation erodes what little earnings they have.
Of course the richest investors can pump money into new ventures started in the lowest regulated markets to realize the highest gains with whatever hoop-jumping to get profits laundered through lowest taxed markets.
* State lotto
* Psychic hotlines
* Supplements/vitamins of dubious value
* Regular stocks with wildly ridiculous P/E ratios
* Various forms of "insurance"
Which is to say, it's never been about protecting people from fraud and it's always been about limiting who's allowed to participate in the capital class activities.
> State lotto
Most gambling is either highly regulated or outright banned. Also, gambling is a financial product, which arguably falls under the category of "investment".
> Supplements/vitamins of dubious value
Because these products are very carefully designed and marketed to avoid the heavy regulation that is applied to medical products
> Regular stocks with wildly ridiculous P/E ratios
These are investments, so this example doesn't really fit into your thesis that the government only regulates investments.
> Various forms of "insurance"
Insurance is a financial product that could also be viewed as an "investment". Further, many types of insurance are highly regulated.
An even better example are the accredited investor laws, which also claim to "protect" people but in reality cut off all but the wealthy from the true upside to investing.
> but in reality cut off all but the wealthy from the true upside to investing
I don't understand the logic here. There isn't a global conspiracy among rich people to stopping others from making money. It doesn't make any difference to Jeff Bezos on whether $1 million gets made by Peter Thiel or a regular person. In fact, Bezos would probably prefer the latter since they're more likely to spend their money on Amazon purchases.
The reason for accredited investor status is because losing money hurts more than winning money benefits unless if you have a lot of money to begin with. One regular person making $1 million doesn't make up for 10 regular people losing $50,000, even though that would be wildly EV positive.
We see people investing in dodgy companies, look at Theranos, not because the business idea is sound, but because the investors have powerful backers and can extract outsize return from inferior product.
And then there's bitcoin, which is not a medium of exchange, not a store of value, not a unit of account, but a pure object of speculation and now even Goldman Sachs advise to put the money there. The real world is not improved by clear-eyed people allocating funds to a Ponzi scheme.
People should be able to spend their money as they please. Again, this is a red herring because their is upside to be had in plenty of these investments. Contrary to the article penny stocks are nowhere near 100% fraudulent.
Heavily regulated.
> Psychic hotlines
Have large numbers of people historically lost fortunes to these?
> Supplements/vitamins of dubious value
Fair.
> Regular stocks with wildly ridiculous P/E ratios
Literally the thing you're criticizing.
> Various forms of "insurance"
Heavily regulated.
This is a heady statement. It goes against all the research I've seen about international markets, though I'm open to changing my view.
Happy to read any links you have that has evidence contrary to that though.
Regulatory capture is corruption. In every scenario we need transparency and enforcement of agreed upon rules to maintain a balanced playing field.
As for the reason these financial products are regulated, they lead in part to the great depression. State has an interest in it because it is in the states interest to maintain a functioning economy.
There are compelling arguments against regulations, particularly in industries that have no business being regulated like aestheticians. Or barbers. There is genuinely no good reason for that. But the suggested vitamins and drugs shouldn’t be regulated, but financial product should be regulated? I’m having a hard time with this one.
[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6683096/#!po=0....
That said, whenever the failure to protect carries a very high cost one would hope those things would get weighted more heavily when protections are considered. Supplements in particular are interesting in that they appear increasingly _designed_ to skirt existing regulations. And as more and more are found doing significant harm the governments of various states have starting paying more attention.
Was getting up 10 times a night. Life was a living hell. Doctors were useless.
So I tried a recommended one. (Aloe Vera pills)
I sleep through the night now.
Now I also have had bad experiences. Elderberry was not fun.
[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6683096/#!po=0....
Stuff is amazing dramatically reduced headaches and muscle aches. Magnesium citrate.
I generally stick to the most expensive ones.
Other variations have not helped, I felt weird on them.
Problem is the same (though to a much lessor degree) for prescriptions.
Plaqunial name brand is drastically more impactful then it’s genetics. So much so, that I have to cut dosage 1/2 to 1/4.
It's not just the stock market, its almost everything about corporate finance. The straitjacket bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness is a big factor. These rules (mainly FDIC insurance requirements) make it near-impossible for many companies to get loans. This problem incentivizes companies to play financial games (e.g., Adjusted EBITDA) to get around the crazy restrictions.
This is why there is an emerging trend of non-traditional lenders (e.g. some VCs and PE firms). I’m sure the government will find a way to regulate them eventually.
If you let scams run rampant, eventually the whole ecosystem becomes associated with scams and the good money and good players just leave.
This is the #1 risk to the largely unregulated cryptocurrency ecosystem. Many people already associate anything cryptocurrency with scams, or even equate the two. Legitimate value creating industries and legitimate players tend to avoid the whole space. Many people refuse to even look at cryptocurrency and block chain oriented technology for fear that being linked with the term will make them look "scammy."
A major objective of all this regulation is to retain US dominance in global finance by protecting US markets' reputation as (relatively speaking) solid and safe.
A good analogy is a "bad neighborhood." It takes only a small percentage of residents in a neighborhood committing street crime (far less than 1%) coupled with police neglect to label a neighborhood "high crime" and "bad," a label that will stick for decades and depress the whole area. Once a neighborhood carries such a label it often takes heavy handed police action or a complete tear-down / rebuild of the area to shake it.
Organized criminals who are willing to be violent displace outlaw entrepreneurs who are peaceful.
(I'm not advocating use of these drugs, just pointing out that less harm would be done if they were pure instead of nasty street jank.)
Established entities always prefer regulations, as it makes it harder for new competitors to join the market.
Depends on the regulations.
Comcast opposed Net Neutrality, for example. Goldman Sachs didn't like the Volcker Rule. Devon Energy pushed for weaker regulations on methane venting and flaring.
Perhaps this suggests a useful principal for government regulation: regulations that promote competition and divestiture, or that force companies to bear the true costs of their actions, are good. Regulations meant to mandate a specific way of doing things are bad, and should instead be structured so that they incentivize entrepreneurs to find the best way of doing things and allow them to bring it to market.
Regulate market structure, not markets.
I'd like to see more print media do well- the NYT still needs competition. Everyone cries about ads and tracking. Put your money where your mouth is and buy print from a source that you enjoy.
There used to be a common descriptor of the Soviet era Pravda that you had to read between the lines to get near the truth. I broadly feel the same way about all of the above media companies.
I agree that the Times represents the institutional / political elites views surprisingly accurately. (Most societies don't have such a public lens into their elites' preferences.)
Your signaling mechanism, however, is poor. Lots of organizations own landmark properties in New York City. Most of them are property management companies. (Brookfield, I believe, owns about 40% of the New York Times building.) New York property types are...let's just say they've cultivated a reputation for eccentricity. Far from establishment, albeit powerful in their own right.
Theoretically, yes. But enforcement was practically nonexistent.
There are some that are legit, but many of them are "greater fool" scenarios -- and that ratio is getting worse as acquisition targets dry up. No one wants to give their SPAC money back, less the music stops...
The common man will end up demanding something more extreme when they lose.
- People should be able to put their money into anything they want
- There should be strong safety nets to protect people who have lost their money/income
Putting your entire net worth (to the point where you're out of room and board) into any investment instrument is unwise. I'd even support regulations at that point, i.e. you may not directly invest more than X% of your income
...but this applies to penny stocks and cryptocurrencies just as much as it applies to an S&P index fund or treasury bonds.
NYT calling for more regulation as usual.
If the question is a challenge for me to provide an unassailable proof that deregulation hurt most Americans: it's economics so I can't provide one.
That's not really their concern, they're pathological hypocrites in reality. They're very happy to keep state sanctioned lotteries plentiful and legal, so the common person can blow their financial brains out handing their hard-earned cash to the government in a scheme that specifically benefits the government (they get you on the tickets, then they get you on a massive tax hit on the win). Unregulated penny stocks are not worse for the common person than government controlled lotteries that vaporize so much money for average people; arguable lotteries are far worse, your odds of winning might as well be zero.
They absolutely do not care about the so called common man, not in the least. They care about control, power; they care about who has it, who has access to it, and who gets to sell it to the highest bidder.
The parts of the penny stock / meme stock world that are drawing lots of negative attention right now are the online communities where anonymous people are giving plenty of "not financial advice" and disclaiming it away with a statement like "do your own DD" (due diligence). Obviously, yes, you should do your own due diligence when acting on a stock tip from a stranger. But even that assumes that the stranger's tip was made in good faith, and wasn't just designed to help them unload something they bought and want to get rid of profitably by hyping a market to unsavvy buyers.
With a lotto, you can see the projected winnings, know the draw date, and usually even know how many other people are buying tickets. With penny stocks from reddit, there's a decent chance the guy offering the tip about which stock to buy plans to exit long before his target price, because he strung together a plausible hype pitch to trick you into getting stuck holding the bag.
The state is usually prevented from lying about possible winnings to sell more lotto tickets.
I'm not sure whether more regulation for retail investors is a good thing or not. But I do think it isn't a very genuine comparison to say that regulating financial markets is a farce because lotteries exist, there is much more information asymmetry in retail stock trades.
More/less regulated is a silly paradigm to think through... especially for long regulated industries. There is no more or less. Regulation are not quantitative, usually. It's about what the regulations are, and what enforcement looks like.
Even the term "regulator" doesn't mean quite what it sounds like. It doesn't just mean "rules governments make." Those are laws. To the extent this article is calling for anything, it's calling for policing... which is also something a regulator does.
> "it is hard for honest people to raise money on the markets (the original purpose of stock markets), but scammers are still there. If stock markets weren't horribly over-regulated, would the VC industry even need to exist?"
Maybe not on some a chalkboard model of the world. In the actual financial world, "penny stock" markets exist for lower cap companies. They are less regulated, for exactly the reason you are alluding to. From the article itself:
"Traded on the lightly regulated over-the-counter, or O.T.C., markets, penny stocks face fewer rules about publishing information on financial results or independent board members. Wall Street analysts don’t usually follow them. Major investors don’t buy them."
VCs exist. OTC markets exist, they just aren't a popular place for startups to raise or for institutions to invest. VCs are. Reality is not a naive theory, so it's hard to say exactly why. We can think theories about why this is. To find out if they're true, we need to find evidence in the world. It's fine to propose that just not rational to conclude that honest people can't raise money because OTC regulators are too busibodied. It's irrational to conclude that without some corresponding facts from the world corroborating it. I'm not talking about absolute proofs... just something.
Ie. pool money and invest? No matter if it is VC fund, hedge fund, pension fund, mutual fund, they all just pool money and invest in something. Which used to be called.. just a 'bank' before all those regulations.
>But current and former regulators say penny stock fraud will remain as long as penny stocks are traded.
It's more fraud's going to happen. The "reminiscent of the 1920s, when amateurs flooded into the stock market before the 1929 crash" is a little ominous.
The simple point is, NYT and other legacy media companies resent that they don't control the news and how it is portrayed, delivered, and worse for them fact checked. They really loathe being called out repeatedly by "upstarts" who aren't real "journalist".
There have been many editors, writers, and more, taken down in recent years that used to operate with impunity within the legacy media. No one would question them or the paper they wrote for. Now they can get caught when they cross the line or worse outright fabricate stories.
So the legacy media simply writes stories that portray social media as bad and in need of regulation, in other words, silencing.
Please try something new, I'm so curious as to why this logical fallacy gets repeated ad nauseam
Is there a better, perhaps more clinical, way to more narrowly describe these kinds of groups? Or is that the right way to say it and my own bias is being applied?
As a worker, my experience has always been the opposite. That is rich folks using the stock market to get some unearned money out of my work.
I just want to know where these special opportunities are hiding. I do have an investment that pays me an annuity from an endowment that includes some less standard investments. But, while they get good returns, they're nothing truly out of the ordinary.
https://www.napa-net.org/news-info/daily-news/retirement-ass...
There is a logical explanation as to why bitcoin could be very valuable in our current world. It is because it cannot be inflated beyond the 21 million cap. If you have an open mind, give it a read!
I can't help but think a lot of volume is from casino enthusiasts stuck at home.
Day trading and short term plays are a casino. It is a zero sum game where every winner has a loser.
Long term holds, index investing, etc. Is arguably not a casino since there is very much a way to play that is not zero sum. You are counting on dividends, actual value being created, and it is possible to make money without there being a 'loser'.
The lottery is one of the more innocent gambling game. The delayed reward, low chance of winning small amounts, and fixed schedule makes it so that it is not nearly as triggering of addictive behavior as other gambling games.
Personally I think the lottery should still be illegal, but it provides a good baseline. Any gambling game that has more effective contingencies then the lottery should at least be heavily regulated (possibly banned). And stocks definitely do.
I guess it's a bit like the Japanese government turning a blind eye to the pachinko parlors.
Especially English<->Other european languages have different meanings to the word billion and miljard.
Although if you dig into it, it turns out that a lot of people are hazy on exactly how much more a billion is than a million, or a trillion than a billion. Quite aside from the short and long scale thing, I just mean that instead of knowing that a billion is to a million as a million is to a thousand, their concept is more like a million is "big", billion is "really big" and trillion is "omg really really big!!!".
You know something I had never thought before? "Hey, I have a business plan — and our target market is the poor."
And yet I have been fascinated with the Dollar Generals (Family Dollar, etc.), the payday loan business, the lottery....
It sounds like you can make a business on the back of the poor – you just need volume.
Of course this is a measurable figure, so I’m willing to accept that I might be wrong.
Robinhood makes money by directing Order Flow through Citadel.
However, you can also do rather conservative options trades (writing out-of-the-money calls on stocks you own and want to sell anyway, for example) and bring in extra money.
This is my preferred strategy as well.
Would hate to have been selling put options on VIAC when Archegos shit the bed on $20B with >4x leverage. Good luck foreseeing that.
To the average ignorant trader, sure. Otherwise this statement doesn't hold water. You should really do some research before making such silly uninformed claims.
Now, I know you're gonna say you can lose all your money when you buy shares, but no -- that very rarely, if ever, happens. If you buy a dividend stock than it's even better as a long-term investment.
The only parties options trading isn't "literally gambling" for are the ones selling the options like market makers (Citadel). They know people like to gamble and they're happy to take the other side of the trade because it's free money when they hedge properly (sounds like a casino, doesn't it?).
Anyone who buys options is literally gambling.
I guess you also believe the entire insurance industry is gambling too. Out of curiosity, what parts of finance do you think aren't gambling?
If you categorize all speculative activity under uncertainty using the same word, that word ceases to be useful.
Buying options, unless you literally buy every option that exists, is not even close to similar.
Did I adequately address your strawman?
Just like you pay health insurance premiums to mitigate against costlier health risks.
You own 1 XYZ at an average price of $200.00. It is trading for $300.00.
You purchase an option to sell 1 XYZ for $300.00, which costs you $10.00, and expires in 3 months.
You just paid $10 to guarantee a minimum profit of $90.00 in 3 months, regardless of whether the price swings down.
There isn’t any morally harmful transaction occurring here, IMO.
It’s actually less risky than owning a stock for 3 months.
Is this transaction a reprehensible one, for you?
To be clear, we’re not trying to say that all options are created equal. Naked options (where you have no position) are in fact straight up gambling, at least insofar as I’ve tried to reasoned about them.
Have you ever priced a derivative? What about the estimation of future/realized risk using implied volatility doesn't seem "rooted in statistical analysis" to you?
Anyone can sell options, not just institutions. And it's still gambling, just with better odds. You can still lose all of your money on the selling side. Naked options even come with the risk of losing more than all of your money. The whole thing is just one big casino with everyone betting against each other to see who's right.
> Naked options
Us plebs aren't allowed to write naked options, that privilege only belongs to institutional actors.
When you to sell the underlying to cover. It's right there in the name. Of course you lose money, it's just that your downside risk is capped.
> Us plebs aren't allowed to write naked options, that privilege only belongs to institutional actors.
Yeah because you'll probably lose all your money. Would you rather be allowed to do something incredibly dangerous and then get met with a dispassionate, "Well, almost everyone fails at this but you tried anyway, should have known better! Thanks for playing."?
Writing any amount of uncovered calls where the present stock price is at least higher than the teens generally exposes you to more risk than the average American can absorb with their entire net worth.
That being said, if you really want to, there are places that will let you do it using margin if you guarantee you know what you're doing. Bad idea though.
If you have a question about options, you can contact the Options Industry Council at 1-888-OPTIONS (1-888-678-4667) or visit its Getting Started web page. On the OIC website, you can also read a number of publications, including the "Characteristics and Risks of Standardized Options" booklet.
Ofcourse if you know nothing about risk management, options, or finance in general, you can just use them as a gambling instrument.
Robinhood and others have been irresponsibly pushing options onto clueless individuals.
I'm concerned this will lead to more regulation, taking away this option for us commoners and leaving it to only the 'responsible educated betters' who run hedge funds and such.
Of course they do. And those little plastic roses they sell in a glass tube at the gas station also have a legitimate purpose. But we all know that's not why they're being sold.
The vast majority of retail options trading is just straight up degenerate gambling. Especially in communities like WSB. And honestly, is there anything wrong with that? It's a much more equitable situation than lottery tickets or a roullette wheel.
This line of suspicious thinking doesn't make sense to me. Options can be used as a speculative instrument, or for one of a number of other purposes (yield enhancement, insurance, volatility hedging, stock replacement, arbitrage, commodity market access, even multi-year investment), but the thing that makes options trading dissimilar from gambling is the simple fact that you are not playing a game of pure chance. There is a large element of uncertainty in the public markets but they are driven by information, and that is why some participants are able to make money.
If people want to blind themselves to information, then sure, you can call it a game of chance. But if I'm analyzing vol and backing out information implied by pricing in order to take directional views around underpriced catalysts for assets that only a handful of people really have the skills to evaluate in that way, am I gambling or am I speculating?
Some may say "all speculation is gambling" but I see a difference between those two activities. It would also be risky to rent drilling equipment and prospect for oil, but there is a science and method to wildcatting and few people would refer to it as gambling in the sense of playing slots or roulette.
Personally I also believe that people who play card games based on probabilistic reasoning are doing more than just gambling. In a sense, that's what casinos do. It's business at the very least, a form of work that in casinos provides a profit opportunity from entertainment and in the public markets provides a profit opportunity from contributing to the information efficiency of financial instruments.
That doesn't mean the market is rational, etc.
You can know all about risk management, etc, but there is no guaranteed winning strategy. Because options trading is gambling.
As I said elsewhere, calling everything gambling just because it isn't literally guaranteed is reductive and unproductive.
> Gambling (also known as betting) is the wagering of money or something of value (referred to as "the stakes") on an event with an uncertain outcome, with the primary intent of winning money or material goods.
Seems like a fit to me. Even if the expected outcome is positive, it is still uncertain, hence it is gambling. If you go to the casino and count cards at the black jack table, you have a positive expected outcome, however you are still gambling.
I don’t think it’s rational to talk about “options” as if they’re all created equal.
I think you’d find fewer people disagreeing with you, if you disambiguated by specifying naked puts and long calls.
Covered puts are downside insurance, like buying flood insurance for your home. It doesn’t make sense for these to be spoken about in the same category, but by talking about “options trading”, it gets lumped in.
If you tell people your uncle goes to Vegas every weekend to gamble, they will have a markedly different reaction than if you tell them he goes and counts cards every weekend.
If you tell people your uncle just took out a huge loan to go to Vegas to count cards, they will have a different reaction still.
Option traders - real ones, mind you - are sophisticated armies of statistics PhD's. I suspect their statistical advantage over Robinhood option warriors is probably a lot more than "slight".
Oh? I guess they forgot to ask me for my PhD at the door when I came to work for the first time.
Depends what segment of the industry you call home, but I can think of several options market-making desks where no trader has a PhD, as well as several hedge fund traders and founders that don't have PhDs and trade options frequently or as their core competency.
"Good at math" doesn't require a PhD; I have some college friends who went on to do engineering PhDs at top research institutions, and they suck at the kind of fluid/heat math and probabilistic analysis that option traders think about. I have worked with PhD mathematicians who were good quants but lacked the stomach and mental clarity to run risk, and one who was so caught up in his math that he needed others to remind him about basic realities like earnings reports for his own positions. That last guy tried to start his own hedge fund and failed.
Outside of a few particular research advisors and fields of study, most of the math that you need to know to trade vol is faster to learn by reading papers and explanations on the internet than by studying for a PhD.
Ultimately what makes someone a good or bad trader is based more upon trade and strategy ideation, backtesting/validation, position sizing, etc, and the P&L is the scoreboard. Take a famous contemporary vol trader like Harsh Padia (or whatever other person you choose) and lock him in a room for a year with Excel, Robinhood, cable internet, a phone line, and a few grand, and he'll still find a way to make money.
> Someone playing with options on Robinhood isn't in a different league, they are playing a different game.
If this is true (I believe it is not) then it's yet another data point suggesting that the market is rigged against certain participants for the enrichment of other participants. Lest you think I'm being hyperbolical, I give you the example of that kid[0] who figured out that HFTs front-run large CME orders and placed his own spoof orders so that he would be able to trade the reversion. On the HFT side, you have many of these "traders, quants, and devs...over 50% PhDs" but their business model may well depend upon front-running new trades right when they posts to the order book, but before the higher-latency public can receive the information. Regulators protect the HFTs by treating the order book as public information, while treating retail practices that defeat their strategies as unlawful.
How much of that depends on a PhD?
Reading HN, you'd think every quant trading firm had the exact same culture and hiring practices as RenTech.
better than the casinos getting the money imho.
They go through great effort to make their trading app feel like a slot machine without giving off the appearance of gambling.
But let the fraud run rampant, and individual investors will lose money. Enough money that it becomes a political problem. That threatens to destroy the market (e.g. onion futures [1]), or at the very least cost the public at large.
The only solution we have is to wait for a crash. But with modern monetarism, and the political cost of unemployment, monetary easing cushions financial assets from economic declines for a long, long time. Long enough for entire generations to have no memory of losing money in the market.
We need another mechanism. We have the same problem with vaccines [2].
[1] https://en.wikipedia.org/wiki/Onion_Futures_Act
[2] Is there a term for tearing down a levy on account of having no flooding on account of having a levy?
Nobody sees any way to get ahead doing work, so they're all looking for get-rich-quick schemes.
https://themargins.substack.com/p/zirp-explains-the-world
Until interest rates go up, capital gonna chase yield.
Lying for Money: How Legendary Frauds Reveal the Workings of the World https://www.amazon.com/Lying-Money-Legendary-Frauds-Workings...
When the usual fees are 1.5% plus a performance fee
I really don’t understand why the SEC allows them to continue without proper disclosures on what they really are....
The whole pink sheet / OTC market was always looking for the next GameStop or "ICO". It was a pump-and-dump playground.
It was a similar environment, as you could gamble with stocks that cost cents per share. Except now, with fractionals, everything can be a "penny stock". The difference is in the volume required to make big price moves.
It's not quite the same thing. You still need to own in lots of 100 to sell contracts. Fractionals are basically just a money making scheme for brokerages taking advantage of naïve retail investors.
If the issue is that a big benefit of shares is holding 100 of them and selling contracts, why not solve that with fractional contracts? Liquidity, probably. But whole shares have the same issue as fractional shares there, as you're still only getting 1/100th of a contractable quantity.
Companies used to do that on a regular basis...