Now You See It, Now You Don’t

The American Stock Market, two steps forward one step back. Or at least that’s the way it was before the financial meltdown. Now it seems to be just the opposite, one step forward and two steps back. Just what does it really mean for the businesses traded on the stock exchange?

To the business it means nothing, absolutely nothing. But how can this be? I own 100 shares of XYZ Company, what do you mean it means nothing to the company? Well yes it is true that it means nothing to the Company.

The only time a Company should care about the price of it’s shares is when it is poised to offer the shares to the public. Once the shares have been issued they are of no consequence to the Company. The company issues shares to raise capital. Once the company sells the shares it has raised the capital it wanted and the shares become nothing more than evidence of ownership in that company.

Now here is where the stock market and wall street come in. If I no longer wish to own a part of XYZ Company I look for someone to buy my shares (part ownership) in that company.

Therefore, one might say that Wall Street is simply a flea market of people selling their tiny part ownerships in companies. If a company is doing well that means the owners will do well, if the company is not doing well then the owners (stockholders) stand to lose their investment in the business (the purchase price of the stock).

I say that because the health of the company has some bearing as to the price one is willing to pay for part ownership (stock) in a company.

So now the company has raised the capital it needed and is out of the game. The players now become those participating in this flea market we call Wall Street. At this flea market (Wall Street) most people investing want to buy a part ownership (stock) at a reduced (cheap) price and resell it at a much higher price (profit). Others want to sell stock they don’t yet have and replace it when the price drops (short sale).

Now here is the interesting thing. A lot of people are saying that they are losing their shirt, that the value of the stocks they own are down. That is not true! If those investors would just hold on to the stock they own nothing would happen in their bank account.

Let’s look at how it works. Suppose you own a hundred thousand dollar home. And that home prices just dropped 20 percent. Your home is now worth only eighty thousand dollars. Does that mean you lost twenty thousand dollars? NO NO. Take a good look at your bank account. Every thing you had is still there. You have lost nothing UNTILL you decide to sell and someone offers and you accept the lower price.

The same is true for the stocks on Wall Street. The value of the offers may have dipped but the ownership and the amount of shares is still the same. If the sellers would just refuse to sell then the price of the investment would go back up.

So as is plain from the above, the fact that the stock market is down has nothing to do with the company losing money. If a company is losing money it is because of poor leadership not because Joe Six-pack sold his 100 shares to Windy the Waitress at a loss. The loss Joe Six-pack suffered is entirely outside of the company.

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Pancho Villa - a bleeding heart liberal Revolutionary.

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