Ask HN: Is the stock market one of the stupidest things we created as a society?
Serious question. I’ve been trying to wrap my head around it but can’t seem to make sense of it.
We could live without it, and in an unequal society it's a bit broken because it tends to concentrate wealth when there's people who have massive amounts of market-making power, but removing it would probably be worse. In the 60s and 70s when ordinary people owned a more significant proportion of shares it worked quite well.
Hot take: It’s a financial Instagram.
Even if you put in 100k into AAPL, the dividend payouts are laughable.
I need a better answer.
It is not connected to profit making at all. People who buy IPO shares believe that the company's stock price will go up and they'll be able to sell the shares for more in the future. That's all. It doesn't matter if the company makes a profit, makes a loss, grows, shrinks, or anything. The only reason to buy shares is because you believe the share price will move upwards. Company share prices go up even when the company makes a giant loss. It's all about predicting future performance, not current performance.
The primary reason why the shares would increase in value is because the company makes a profit and shares it through dividends (eventually), but there are plenty of others.
People also buy shares because it enables them to vote on what the company does, but I imagine that's a relatively minor factor in the stock market.
Dividends are just the easiest way to think about what a stock means. If the company keeps the money, you still own a piece of that profit. It's just not cash in hand. In the case of Apple, they have so much money that when you buy a share you own (among other things) $4 per share just in their (absurd) cash supply. (They own $200 billion in cash, which isn't a great use of their money.)
That doesn't mean that the market isn't irrational, but it's predictably irrational. Which means you can make money from it in one of two ways:
* Predict what the irrational people are going to do * Ignore the irrational people and trust that in the long term (10+ years) the actual money that the company makes will give you a decent return.
The first is risky, because you're trying to predict people. That's most of what you hear about on the news, and looks like Instagram. It's stupid, but very profitable, because a lot of people bring in a lot of money.
The second is slow, and more work (because you need to find stocks that aren't already overpriced by irrational people), but in the long run it actually works out. Unlike the first option, you're not just gaining money from other people. You're making money from the actual company's earnings -- still not "predictable" but if you know the domain you can make good, educated choices.
The nice thing about the second route is that you can shortcut all of that by just buying a little of everything. That's what index funds are for -- pool your money with other people and buy some of every stock together. It works very well over the time scale of getting to retirement.
And the best part of that is that you can ignore the news. Over that time scale fads come and go. High-visibility trends that make headlines one day are just gone and forgotten. You don't even need to read the news -- in fact, you shouldn't.