I(’m )PO(ed)

rgbact,

what the hell is their “prod­uct” anyway?

As with many indus­tries, Face­book lives at the inter­sec­tion of mul­ti­ple mar­kets. The net­work effect they have pro­vides an easy mech­a­nism by which to social­ize and share infor­ma­tion with peo­ple you know. That net­work effect pro­vides a wealth of eye­balls. The people’s activ­ity pro­vides a wealth of demo­graphic infor­ma­tion, which is valu­able to adver­tis­ers because of the effec­tive­ness of tar­get­ing. And that leads to the sec­ond mar­ket, which is con­nect­ing com­pa­nies with poten­tial future customers.

It’s sim­i­lar to advertiser-​​supported tele­vi­sion. Is the prod­uct enter­tain­ment to view­ers, or eye­balls to adver­tis­ers? The answer is “yes”.

Mule,

Let the record show that DC is insin­u­at­ing stocks are a “use­less product.”

While he is wrong in an his­tor­i­cal sense, in the case of Face­book he’s closer to right than you per­haps real­ize. If you buy Face­book com­mon stock, what do you get in exchange for your purchase?

You don’t get a div­i­dend, until and unless Mark Zucker­berg decides you do.
You don’t get to vote for the Board of Direc­tors.
You don’t get to vote on a sin­gle com­pany pol­icy, ever.

The only things you get are:
1) The option to sell the share (the one with no div­i­dend or vot­ing rights) to some­one else.
2) The option to sell it back to the com­pany at a later date at what­ever price the com­pany wishes to offer.
3) On the off chance that the com­pany becomes worth lit­tle enough to be bought by some­one else, and Mark Zucker­berg agrees to sell it, you might get a slice of the pur­chase price…but only if Mark Zucker­berg wants you to.

These aren’t your father’s shares.

rgbact,

I think TV gen­er­ally thinks prod­uct first, adver­tis­ers come 2^nd.

You may think that, but if you ask the peo­ple who actu­ally do the think­ing within the TV indus­try, you’d find that you have it backward.

Maybe they’ll start devel­op­ing more con­tent though.

Facebook’s con­sumer draw has zero to do with them devel­op­ing con­tent. I’m afraid you don’t under­stand their con­sumer draw at all.

DC,
I sus­pect you may have as much of a per­cep­tion prob­lem as those with whom you are con­vers­ing. Let’s look at your questions:

1) What pri­mar­ily gets bought and sold in the stock market?

Pieces of companies.

2) What is a pri­mary goal of indi­vid­u­als who decide to par­tic­i­pate in the stock market?

The answers are myr­iad. You see only spec­u­la­tors, but there are many oth­ers who invest for many other rea­sons. They rep­re­sent a good hedge, poten­tial income (if one is buy­ing shares in com­pa­nies that issue div­i­dends), or meth­ods of extract­ing value from par­tic­u­lar grow­ing seg­ments of commerce.

3) If there is a lim­ited sup­ply of money, and if the amount of money in the mar­ket increases, where does that money come from?

The answers here are also myr­iad. The sim­plest answer is “else­where”, but that doesn’t tell any­one any­thing meaningful.

One thing to con­sider here…stocks rise in price for a lot of dif­fer­ent rea­sons. Per­haps you should con­sider more of those rea­sons than it appears you are.

DC,
The point about own­ing a piece of a com­pany is impor­tant. Tra­di­tion­ally, this would mean that the mar­ket cap­i­tal­iza­tion should equal the net present value of all expected future earn­ings. And the share price, of course, is merely the mar­ket cap­i­tal­iza­tion divided by the num­ber of out­stand­ing shares. This is why the earnings-​​per-​​share ratio is so impor­tant. It gives a sense of how much longer the cur­rent rate of earn­ings should be expected to last, assum­ing the stock is well-​​priced.

So, if a company’s net present value of all expected future earin­ings is $1B, then the mar­ket cap should be $1B. And if there are a bil­lion out­stand­ing shares, the price per share would be $1.

Of course, there’s inher­ent risk in future prof­its. Cir­cum­stances change. And that’s why the stock prices should be expected to change over time. Also, the less cer­tain the future prof­its, the higher the risk dis­count should be, and thus the lower the share price should be to cover that risk discount.

This all leads to some inter­est­ing diver­sions, such as the incen­tive for cor­po­rate raiders (capital-​​plant-​​heavy com­pa­nies are the most obvi­ous tar­gets), the hid­den effects of dif­fer­ent classes of stocks, and the poten­tial impacts of increased amounts of money enter­ing an oth­er­wise unchanged stock mar­ket. But that’s for another time.

Mule, you need a lit­tle more patience on this. Fol­low along, and jump in as needed…

DC,

Unless you’re buy­ing a piece of the IPO, you’re not con­tribut­ing to the oper­at­ing cap­i­tal of the company.

Cor­rect. Now, why might the stock price be higher at a later date than it was at the IPO, assum­ing the IPO price was set at fair mar­ket value?

There is a minor excep­tion deal­ing with the fact that if the stock price rises, the com­pany may be able to con­vince banks and other investors to lend it addi­tional money for the pur­pose of future expansion.

This is not at all minor. And it’s also the way that the com­pany can con­vince investors to buy shares in the com­pany in future stock offer­ings as well. Any­thing but minor.

Most pri­vate investors don’t own enough stock to have a real­is­tic say in anything.

The same argu­ment can be made against vot­ing in elec­tions for pub­lic office. You do vote, don’t you?

So the “good or ser­vice” you pur­chase is pri­mar­ily the chance to gam­ble on gain­ing more money for yourself

About that…why might the stock price be higher at a later date than it was at the IPO, assum­ing the IPO price was set at fair mar­ket value? (Yes, I know I asked above, but the answer is rel­e­vant here, too.)

if you and I con­tinue to trade the same shares back and forth, adding, say, 2% to the price each time, we both get rich

On paper, per­haps, but not in any real sense. Can you fig­ure out why?

DC,

They are drawn into the mar­ket by a vari­ety of forces, many of which are beyond their control

Really? I can imag­ine a few cor­ner cases where forces beyond their con­trol draw a few peo­ple into the stock mar­ket (the Enron 401k comes to mind).

Since the Rea­gan era, there’s been heavy pres­sure to put retire­ment money into the mar­ket, rather than rely on Social Security

Really? I don’t recall any pres­sure for peo­ple to refuse to cash their Social Secu­rity checks and instead stick with the stock mar­ket. Nor have I heard of any instances of Social Secu­rity ben­e­fits hav­ing been cut since the Rea­gan deal (and, even then, the focus was on delay­ing retire­ment, not shift­ing away from Social Secu­rity payments).

I think you need to restate this one.

Par­tic­u­larly with the advent of inter­net trad­ing and the like, many of these indi­vid­ual investors are hop­ing to get rich with only a minor injec­tion of money

I’m sure some do. And it turns out that it’s eas­ier to do this with a major injec­tion of money than with a minor one…but that’s a sep­a­rate issue entirely.

most peo­ple are not in a posi­tion to under­stand what they’re doing

And so your sug­ges­tion is what, exactly? Elim­i­nate the stock market?

For the major­ity of share­hold­ers in the Mar­ket, it’s a crap shoot, with the odds weighted in favor of the house.

And you know this because…?

Mule,

the only answer is to reg­u­late every facet of com­merce into what he and his ilk think are Good and Right.

I sus­pect you’re pro­ject­ing. Yes, he’d like more reg­u­la­tion than we cur­rently have. But there’s a pretty big chasm between what we have (which you admit is insuf­fi­cient trans­parency) and “regulat[ion of] every facet of com­merce”, yes?