The way I understand stocks to work, is a company needs capital. It offers to sell part of the company to investors. Investors buy up pieces of paper–literal or virtual–for whatever the market will bear when the initial sale is going on. They go public at $15, then maybe it climbs to $30, maybe it drops to $5. You collect whatever money is invested, and that is now operating capital. In exchange for buying your stock, you periodically pay dividends.
Once the stock is sold once, it becomes a commodity in its own right. You may have bought it for $15, but now you the investor try to sell it for $20 and pocket the difference. This part of our market is, in my view, irrational and should be abolished.
Here is my reasoning: if buying low and selling high is the objective, then psychology enters the picture in addition to business fundamentals, and disrupts consideration of the actual value and performance of the company. What intrudes instead are guesses as to what everyone else will guess. What evolve in short order are synchronizing signals, that indicate buy or sell, not for intrinsic business reasons, but because they allow you better to predict what everyone else will do. It’s like a group of people on a boat at sea. They all rush to one side of the boat, then to the other, and the whole thing is never really in balance.
Concrete examples: layoffs used to signal buy. You saw “layoff”, and you knew everyone else would buy, and if your particular software was faster than someone elses, you could hit the float before it peaked, and sell before it dropped, pocketing the difference. This is stupid.
What it does is make good companies underfunded, and crappy companies that market well overfunded, until they go bankrupt after making fortunes they still keep, at least in part.
The bottom line is NOBODY IS MAKING ANYTHING. There is no business value to this, other than that it sucks money away from groups that are less predatory. Yes, stocks go up in time, but so does inflation. I don’t have the facts, but one could speculate–accurately in all likelihood–that most of the gains in the market over the last 100 years have to do with inflation. Stocks, like everything else, should not rise in value; what should happen is they pay better and more frequent dividends. At least, that is my belief for now.
My proposed solution is that all companies that want to go public determine the price of their stocks, based on how much money they want to raise. That, then, is the price. What will vary thereafter is how many are created. Say they need to raise $1 million. They offer to issue up to 200,000 $5 stock certificates. If they sell them all, then they get their money. Investors make money on the investment through dividends, which well run companies will pay more of, and poorly run companies less.
In effect, I am proposing converting stock issues to something like bond sales, except that you get variable “interest”, and voting rights. When you sell the stock, the price is still $5. That may seem contrary to free enterprise principles, but what we are wanting is stability that is not skewed in favor of the very rich. You can still buy or sell as you choose, and companies can still attract capital for expansion.
Particularly if we eliminate easy money, business fundamentals will have to be observed. Capital can still be raised, but the ridiculous fluctuations of the market–which self evidently can be influenced EASILY by large enough traders–go away.
Actually, let me dilate on that last point. If you own large parts of some stock, say Proctor and Gamble, if you sell enough of them at once, you can start a freefall. You short the stock, then sell your shares, and Wall Street being what it is, the fall will continue for some period of time. If you need to, you can partner with someone who sell short, and you then dump the stocks.
This sort of thing used to be routine on Wall Street. A group of men would literally sit around with brandy and cigars, and pick a stock, any stock. One would buy some, then another, then another. They would pay off a journalist to write something positive about the stock, which would appear credible since the price was climbing, so others would jump on. At some point, they would all sell, returning the stocks to something close to what they should have been valued, and in effect pocketing the money of everyone who bought late.
Again, this is wealth redistribution. Banking and securities laws have made it much harder, but far from impossible. The system is prone to corruption, serves no useful purpose in the manufacture of concrete things, and should be abolished in the way I suggested.