Comfort Zone

[Actaeon]

I hereby declare this thread a place to ask questions outside of your primary fields of interest without being mocked by your comrades. The majority of our current threads are community-themed, so my hope is that this could bring us back to the intellectual discussion days of yore.

 

I promise I'll ask a question just as soon as I find out where my comfort zone is and what lies outside it.

[Lilith]

why you gotta make threads that i have no reason to post in

[Actaeon]

Why you gotta post if you have no reason to?

[Sudanna]

So this is a posting game already.

[Actaeon]

In order to avoid such a fate, I'll go ahead and open myself up to accusations of stupidity.

 

Can someone explain, to whatever extent I might be able to comprehend, how our economy is dependent on the stock market. I was able to grok a system linking production with capital, but am entirely flabbergasted by speculation. Our quality of life, in the US and worldwide, seems to fluctuate wildly without any basis in crop yield or industrial productivity.

 

I know I've brought this up before, but I'm still confused by it.

 

Plus, now Lillith and everyone else that already know everything have a reason to post.

[Alorael at Large]

I'm no expert, but I don't think it's a clear, direct cause and effect. When business are doing poorly their stock drops in value. If they go bust their stock loses all value, which also means shareholders have lost assets. If they depended on those assets, now they find themselves in worse financial straits. At minimum, they're likely to cut back on spending, which in turn means less money goes to businesses depending on consumers. When this spirals badly enough the results are recessions and depressions.

 

—Alorael, who of course has oversimplified. Among other things left out are the fact that banks have to cover their losses and also invest in stocks, and the fact that other markets (real estate, commodities) have their own roles. Still, stock prices and (perceived) business health are directly linked.

[Erebus the Black]

What I could never understand is why if a company is doing great but the stock all of a sudden plummets, the company may find itself in dire straits.

[Goldengirl]

Originally Posted By: Actaeon

In order to avoid such a fate, I'll go ahead and open myself up to accusations of stupidity.

Can someone explain, to whatever extent I might be able to comprehend, how our economy is dependent on the stock market. I was able to grok a system linking production with capital, but am entirely flabbergasted by speculation. Our quality of life, in the US and worldwide, seems to fluctuate wildly without any basis in crop yield or industrial productivity.

I know I've brought this up before, but I'm still confused by it.

Plus, now Lillith and everyone else that already know everything have a reason to post.

To put it simply, the economy doesn't depend on the stock market. The stock market is a relatively small indicator of the economy. This, I think, is where the confusion comes in about the stock market "causing" economic turmoil - it's a microeconomic indicator of macroeconomic trends, and a relatively unstable one at that.

I suspect your question is actually about the financial system as a whole, which is a bit more complicated. You see, the stock market is a sampling of businesses that allow ownership to be sold openly on the market, with all owners of a company "sharing" ownership of it - hence, shares. The equilibrium price for any given stock is decided on by the market processes of supply and demand, which are driven in this market specifically by company and market reports, as well as by speculation. When there is a large difference between speculated value and real value, the price has to return to equilibrium and people's assets can be devalued as a result.

Why get involved in such an uncertain market in the first place, then? Well, every now and then you might get a check in the mail from a firm you've invested in. Alternatively, the firm can take those profits and reinvest them in their own business operations, which is also good because it means that the equilibrium price of the stock will rise. Thus, one would be able to resell the stock, if one desired, for a profit.

[keira]

There are no questions outside my comfort zone.

[Actaeon]

Area of specialty, then. Unless you are an expert at everything from canning fruit to Nissan repairs to fluid dynamics to paleontological excavation to underwater basket weaving?

[Cairo Jim]

I can make stuff out of steel, if that counts.

[Lilith]

Originally Posted By: Microsoft lacky

What I could never understand is why if a company is doing great but the stock all of a sudden plummets, the company may find itself in dire straits.

The causation is usually the other way around: most of the time if a company's stock suddenly takes a dive, that's because something has gone badly wrong for it or is expected to. Investors buy stock in a company because they expect it to rise in value, which will generally happen if the company itself rises in value. Having said that, a reduction in stock prices can also be harmful to a company in itself for a couple of reasons: it'll make it harder for the company to raise extra capital by issuing stock (because the stock isn't worth as much as it used to be), and it's a sign that investors are pessimistic about the company's future earning potential (making it harder to get loans on good terms). Still, stock prices are mostly important in that they reflect the underlying value of the company -- if stock prices drop for no good reason (for example, if a trader mistakenly sells a large amount of stock for a very low price), the company will normally recover nearly all of its stock value pretty fast.

A stock market crash, where lots of stocks go down by a large amount at the same time, means that investors are expecting the entire economy to do badly, and are desperately pulling their money out of stocks and putting it in what they see as safer investments. To some extent this is a self-fulfilling prophecy: the less investment there is, the harder it is for companies to make money.

[Enraged Slith]

Article: http://www.bbc.co.uk/news/world-us-canada-19852721

 

Any Canadians here want to share what you think about your Supreme Court's recent decision to ease the HIV disclosure law?

 

I'm just trying to wrap my head around what "realistic possibility" of transmission specifically means and how a layman is supposed to gauge just how communicable their virus is. The risk of transmission with a low viral load and a condom is apparently "negligible", but what if the condom breaks? Are viral loads subject to change day to day or even hour to hour? What about if the carrier's virus grows resistant to the medication; will the virus then become more communicable and will the carrier know in time to warn their partner?

 

Regardless of whether or not those potential factors are legitimate, it just seems to me like this change strips the right of healthy people to make an informed decision about their own health and safety. I'm honestly surprised with the court's decision.

[The Reverend]

Originally Posted By: Lilith

Originally Posted By: Microsoft lacky

What I could never understand is why if a company is doing great but the stock all of a sudden plummets, the company may find itself in dire straits.

The causation is usually the other way around: most of the time if a company's stock suddenly takes a dive, that's because something has gone badly wrong for it or is expected to.

Stocks can also decline on good news, which can be frustrating to small-time individual investors who may not react as fast as the big automated traders. If good news is expected it can end up being priced into the stock. Investors expecting the good news will buy ahead of the news and run up the stock price, and then sell and take a profit after the good news is released. It's not uncommon for the investors who bought in at the tail end of the run up to lose money because all the investors who bought at the beginning of the run up start selling off as soon as the news is released, causing the stock to drop (sometimes quickly).

[Randomizer]

Stocks have to deal with different investment types:

 

Fundamentalists - They believe the stock price is based on company news and economic markets. Good news or the anticipation of good news drives the price up. Bad news or selling off when good news is confirmed drives the price down.

 

Technicians - They don't care what the company does. They only look at charts of past stock behavior and predict what will happen based on comparisons of daily behavior with the trend lines of averages over 7, 30, 90, and 200 day prices. They tend to buy and sell when a break out occurs from the trend. Easiest way to annoy them is to show a chart of past behavior and ask for a prediction when you already know the result.

 

Quants - Quantitative analysis where past stock behavior is modeled by computer algorithms. This gives formulas where the future is predicted according to equations. This is where physicists go to make the big bucks. They are used to modeling chaotic systems to predict results and the market is another chaotic system. This fails when an extraordinary event pushes a stock outside the predicted range. Also since most models are similar, when one investment group does something it causes all the others to follow.

 

The rest of us - We are too slow to get information and trade compared to the high speed professional traders. The best we can do is pick something and wait. Then sell when there is enough profit and don't wait for a peak.

[The Reverend]

Here's a question I like to ponder - is the stock market "good" for the economy? Or, to put it another way, what would the economy look like if we didn't have a stock market, and businesses raised capital solely via loans and revenue streams? Would we be better or worse off? I go back and forth on this question, but am curious what others here think.

[Mosquito---Slayer]

I had say that due to lesser availability of capital companies will be slower in expansion, that might mean lower job creation and such, on the other hand when some company goes bust they would not be putting common people's money at risk so that will be a plus point, Overall I believe that positives are probably more than that of the negatives , after all when you put money in a stock you know beforehand that there is a risk.

[Alorael at Large]

Originally Posted By: Enraged Slith

What if the condom breaks? Are viral loads subject to change day to day or even hour to hour? What about if the carrier's virus grows resistant to the medication; will the virus then become more communicable and will the carrier know in time to warn their partner?

If the condom breaks the chance of delivery is still probably reduced, but yes, it's a serious concern. Viral loads don't change hourly, or daily, or even weekly. The changes are actually quite slow. Consider how long it took for people to die of AIDS even before there was any effective therapy. The changes are quite slow.

—Alorael, who doesn't think the development of resistance has been documented as a problem in reliably treated HIV. The problem is mostly people who take irregular antivirals not as prescribed, or who just stop taking them altogether for long periods.

[The Reverend]

Originally Posted By: Mosquito---Slayer

I had say that due to lesser availability of capital companies will be slower in expansion, that might mean lower job creation and such

This is certainly a good argument for the pro side.

For the con side, I wonder if being owned by stock market investors distorts the goals of companies by incentivizing growth over everything else (e.g., a sustainable business model). Most shareholders care only about the stock price rising*, and the stock price (in theory) only rises when the company becomes more valuable. A profitable company with a solid, sustainable business which is able to pay its employees well, but isn't growing, will not make the stock price rise, and thus will not make its shareholders (i.e., owners) happy. So rather than contentedly maintaining their sustainable business model, they are forced to take risks to try to grow and expand, or to try raise profits by cutting costs (e.g., layoffs, benefit/salary reductions, etc).

*Income investors who target dividend paying stocks are the exception ...

[Randomizer]

It depends what you want to do with your shares. If you plan to sell soon, then you want a rising price. If you plan to acquire more shares, then you want a stable or decreasing price.

 

Some companies tied executive compensation to stock price and that caused an increase in stock prices without improving the long term prospects for the companies.

[Mosquito---Slayer]

Originally Posted By: The Rev

A profitable company with a solid, sustainable business which is able to pay its employees well, but isn't growing

I am not sure that's a viable business model, In a competitive environment such a company will be eventually swamped by a larger company which will be able to offer better products by virtue of more research/capital infusion into the product.The only case where such a model might be successful is if the company has a monopoly over the product which is a rather rare scenario in today's world.
Basically I don't think a company which is not growing can have a sustainable business model, also the owner of any company will always want it to grow, so that is not actually a singular expectation of shareholders rather it's a shared aim of both owners and stockholders.

[Harehunter]

Nice summary:

Originally Posted By: Randomizer

Stocks have to deal with different investment types:

Fundamentalists -[snip]

Technicians - [snip]

Quants - [snip]

The rest of us - snip

 

One thing that has bothered me is the behavior of the stock market and how volatile it is with respect to the "futures market", which is reflected almost immediately in the current value of a commodity. What troubles me mostly is that, while the cost of producing a commodity has not changed, the price of it can sky rocket at the hint of a possibility of something bad that may or may not occur in the future.

 

Sometimes it seems that the stock market is run by a bunch of lemmings.

 

That being said, without the stock market, raising capital to start or grow a business would be far more difficult.

[Alorael at Large]

Originally Posted By: The Rev

Here's a question I like to ponder - is the stock market "good" for the economy? Or, to put it another way, what would the economy look like if we didn't have a stock market, and businesses raised capital solely via loans and revenue streams? Would we be better or worse off? I go back and forth on this question, but am curious what others here think.

Worse off. The idea of stock was created for a reason: businesses wanted the money now and investors wanted the money in the future. Everyone wins, ideally! And everyone wins by long-term trends, too. It's only short-term volatility that's dangerous if you might need money soon.

—Alorael, who does not understand the idea that a company not growing is one that will be bought out. If your company is the optimal size and remains innovative, it does not need to grow. It can keep generating new sources of revenue as it loses old ones and happily keep going indefinitely. Shareholders might not love it, but if you still have a controlling interest you can ignore them.

[Lilith]

Originally Posted By: Harehunter

One thing that has bothered me is the behavior of the stock market and how volatile it is with respect to the "futures market", which is reflected almost immediately in the current value of a commodity. What troubles me mostly is that, while the cost of producing a commodity has not changed, the price of it can sky rocket at the hint of a possibility of something bad that may or may not occur in the future.

there are also a lot of advantages to futures markets though. it allows cautious investors, or people whose livelihood depends on the underlying value of a business or its products, to hedge against future price changes and minimise their risk. it also provides a clear financial incentive for firms to anticipate supply or demand shocks in advance and prepare for them instead of scrambling to react when they happen, which actually helps even out prices in the long run. at least that's how it works when it's working well

[Goldengirl]

Originally Posted By: Mosquito---Slayer

I had say that due to lesser availability of capital companies will be slower in expansion, that might mean lower job creation and such, on the other hand when some company goes bust they would not be putting common people's money at risk so that will be a plus point, Overall I believe that positives are probably more than that of the negatives , after all when you put money in a stock you know beforehand that there is a risk.

The best way to do this is to look at ceteris parabis conditions. Beforehand, you have people with money to invest. In a theoretical scenario without a stock market, those people would still want to invest their money somewhere, and so they'd likely move over to bonds.

The difference between bonds and stocks are manifold. With stocks, you're buying partial ownership of a company. With bonds, you're buying a company's debt. Both can tank, leaving you penniless; most likely, that would happen at the same rate. However, without stocks, firms would change their organizational structure drastically. CEO's, boards of directors, etc. would all necessarily be gone as they are no longer needed to represent stockholders; this one is harder to call, but I'm willing to say that this would be a net negative as there is less democracy in management decisions. And, when a business did tank, it would be harder on the people running the company, because there would not be unlimited liability.

The mere fact that people choose (en masse, most often) to buy stocks also shows that they have a different appeal than bonds. They're a more long term investment, and they give one a better return over time with less risk as a result, depending of course on the stocks purchased.

Though it seems like it's a drain on the economy intuitively, the stock market specifically and the finance system generally provide a very important function for the economy as a whole.

[Dantius]

I feel compelled to point out that, for around the past fifty or so years, it's been quite apparent that, although stock prices occasionally decide to utilize information from the company that they represent, the prices 95% of the time are basically stochastic (i.e. a random walk) in nature. It's pretty much impossible for small investors to compete with any big players (hedge funds, I-banks, etc), simply because the latter has so much more information and tools to analyze the data and discern patterns. Renaissance Technologies, for instance, has been returning ungodly amounts of money on a regular basis for decades thanks to supercomputers and hundreds of PhD's, things that your basic mom and pop investors can't hope to posses. Pretty much the only way for personal investors to win is to try and play the long game with sufficiently frequent re-balancing to prevent any large losses, and to only dabble in futures shorts or such when you're absolutely sure what you're doing.

 

Originally Posted By: Goldenking

Why get involved in such an uncertain market in the first place, then? Well, every now and then you might get a check in the mail from a firm you've invested in. Alternatively, the firm can take those profits and reinvest them in their own business operations, which is also good because it means that the equilibrium price of the stock will rise. Thus, one would be able to resell the stock, if one desired, for a profit.

 

The best reason to get involved with the stock market is because, over the medium-to-long term, a well-made portfolio, even if it's just blue chips, will make you massive returns, if you're willing to take the paper losses that come every once in a while and not freak out and dump everything. Plus, a few solid dividend stocks are a nice way to earn a little extra cash, and some- like ATT- are very nonvolatile, so there's not much risk of losing massive money. like you might on, say, Apple (which I maintain is hugely overvalued and will take a serious hit sooner or later)

 

Originally Posted By: Lilith

The causation is usually the other way around: most of the time if a company's stock suddenly takes a dive, that's because something has gone badly wrong for it or is expected to. Investors buy stock in a company because they expect it to rise in value, which will generally happen if the company itself rises in value. Having said that, a reduction in stock prices can also be harmful to a company in itself for a couple of reasons: it'll make it harder for the company to raise extra capital by issuing stock (because the stock isn't worth as much as it used to be), and it's a sign that investors are pessimistic about the company's future earning potential (making it harder to get loans on good terms). Still, stock prices are mostly important in that they reflect the underlying value of the company -- if stock prices drop for no good reason (for example, if a trader mistakenly sells a large amount of stock for a very low price), the company will normally recover nearly all of its stock value pretty fast.

 

This is largely true, but keep in mind that the market doesn't give a price that reflects the true value of a company/commodity/whatever, but rather the price that everyone agrees on. Keynes has a famous quote on this that I'm not willing to look up in its entirety, but the gist is that, in picking stocks, you don't want what you think is good, but rather the ones that you think everyone thinks are good, and sometimes they're all wrong. Obviously, this is what happened with the subprime market- everyone thought the bundled loans were solid enough that they wouldn't default, and they were all wrong, except for the few people willing to take a loss for years betting that they would. Another example is gold- the price of gold is almost entirely dictated by speculation, and not the industrial uses or quantity being mined or other factors of gold. To paraphrase the Economist, gold is more likely to rise if people think that Obama is the Antichrist or Bernanke is in the pocket of the Illuminati than if there's an upswing in demand for those tacky golden USB cables.

[Student of Trinity]

No doubt Apple will take a huge hit sometime.

 

I figured out Apple was onto something back in 1999, when OS X didn't crash and the "desklamp" iMac showed a new kind of industrial design for consumer electronics. I also figured out that this knowledge was probably widespread and already reflected in the stock price, in accordance with the random walk theory. So I didn't buy Apple stock.

 

Then it kept rising. I figured it would take a huge hit sometime soon. So I still didn't buy Apple stock. This has repeated a few times, now.

 

I guess I never will buy any of Apple. I'll miss out on getting stung in that big hit, when it finally comes. I've also missed out on a lot of money. Am I smart, or stupid? I don't know. But I think I'd have been richer if I'd just bought a lot of Apple stock back in 1999.

[Dantius]

Originally Posted By: Student of Trinity

No doubt Apple will take a huge hit sometime.

I figured out Apple was onto something back in 1999, when OS X didn't crash and the "desklamp" iMac showed a new kind of industrial design for consumer electronics. I also figured out that this knowledge was probably widespread and already reflected in the stock price, in accordance with the random walk theory. So I didn't buy Apple stock.

Then it kept rising. I figured it would take a huge hit sometime soon. So I still didn't buy Apple stock. This has repeated a few times, now.

I guess I never will buy any of Apple. I'll miss out on getting stung in that big hit, when it finally comes. I've also missed out on a lot of money. Am I smart, or stupid? I don't know. But I think I'd have been richer if I'd just bought a lot of Apple stock back in 1999.

I keep toying with the idea of buying a couple of far-out put options on AAPL, but I never wind up doing it, because I'm just not confident in my ability to fix a date to the crash beyond "probably within the decade". I mean, the WSJ called out the market for acting exactly like it did during the tech bubble, and if you'd bought options then, you'd have lost out.

Plus, they get expensive fast if you're willing to go further out. NASDAQ lists AAPL puts at like $75 a share to buy with a $500 strike that expires in Jan 2015, and buying enough to make a decent profit means that I'd likely just be throwing away thousands on a guess if I got it wrong.

[Randomizer]

Even if you are right in a stock's direction you can still lose out with the timing. I've stayed out of buying options and shorting stock just because you can easily lose money by being off by a few months.

 

SoT - Apple back in 1999 wasn't that great a bet because it was years away from the iPod, iPhone, iPad revolution that pushed the stock to great heights. However I held off buying only a few years ago when it was still only $70.

 

I also never bought Google even though I knew it would do well.

[Lilith]

Originally Posted By: Dantius

I keep toying with the idea of buying a couple of far-out put options on AAPL, but I never wind up doing it, because I'm just not confident in my ability to fix a date to the crash beyond "probably within the decade". I mean, the WSJ called out the market for acting exactly like it did during the tech bubble, and if you'd bought options then, you'd have lost out.

"markets can stay irrational longer than u can stay solvent" -- oscar wilde

[keira]

Originally Posted By: Lilith

"markets can stay irrational longer than u can stay solvent" -- oscar wilde

[sic]

[nikki.]

Originally Posted By: Sylae

Originally Posted By: Lilith

"markets can stay irrational longer than u can stay solvent" -- oscar wilde

[sic]

fun fact: oscar wilde invented text-talk a century before texting was invented

[Tyranicus]

Originally Posted By: Nikki.

Originally Posted By: Sylae

Originally Posted By: Lilith

"markets can stay irrational longer than u can stay solvent" -- oscar wilde

[sic]

fun fact: oscar wilde invented text-talk a century before texting was invented

But, that means I should hate Oscar Wilde, and I could never do that!

[Dantius]

Originally Posted By: Lilith

"markets can stay irrational longer than u can stay solvent" -- oscar wilde

Originally Posted By: Abraham Lincoln

The thing about quotes on the Internet is you cannot confirm their validity.

[The Mystic]

Originally Posted By: Harehunter

One thing that has bothered me is the behavior of the stock market and how volatile it is with respect to the "futures market", which is reflected almost immediately in the current value of a commodity. What troubles me mostly is that, while the cost of producing a commodity has not changed, the price of it can sky rocket at the hint of a possibility of something bad that may or may not occur in the future.

It's usually due to two emotions: fear and greed. When there's bad news, fear causes the price to plummet; when there's good news, greed can cause prices to skyrocket. I realize that's an extreme overgeneralization, but you should get the idea.

Originally Posted By: Harehunter

Sometimes it seems that the stock market is run by a bunch of lemmings.

Dude, you have no idea, although I think "sheep" would be much more accurate.

Originally Posted By: Student of Trinity

No doubt Apple will take a huge hit sometime.

No doubt every company will take a huge hit sometime; this is a simple fact of business. How a company deals with the hit usually says a lot about running it.

Originally Posted By: Randomizer

I also never bought Google even though I knew it would do well.

I looked into it too, and came to the same conclusion, but I didn't buy either. Then again, at the time, I could barely afford a stick of gum, let alone a share of stock, so I couldn't buy even if I wanted to. Looks like we both missed out on that deal.

I'm just glad I passed on Facebook.

[Cairo Jim]

As far as I can see, a person that is willing to invest in one point in shares, also needs to invest in 10 points of common sense first.