Stock valuation has always seemed like play/imaginay money to me. Until I sell my stock and buy that large purchase, I treat mine like just a number.
Imagine you’re the richest person on the planet, and own 1 trillion monies in stock of Omnia Corporation. Can you buy 1 trillion ice cream cones for 1 money each? No, because you can’t sell 1T stocks without utterly devastating the stock price… But you sure can take a loan backed by this imaginary money. Boggles my mind.
I wish someone with economics background would correct my thinking.
I have a bachelors in economics and your pretty close except you’ve got realize that all money is like this. If you’ve got a us greenback in your pocket and if I decide it worthless to me, and you want something from me then all you’ve got is a small piece of art.
All value is just agreements between people and money is just a method of keeping track of favours owed that we worked out thousands of years ago.
In the example of a stock, all a stock is, is an agreement between the company that issues it and its holder, that the company will do you a favour (give you some money, a dividend) some time in the future, and keep doing it every time they have some extra favours to hand out.
I may decide that the promise of those future favours are worth doing a lot of favours right now or only a few.
Right now everyone who buys and sells stocks doesn’t think a lot of companies aren’t going to be able to a lot of favours in the future so the value in the stock market has gone down. But that doesn’t mean a trillion dollars has disappeared it just means that the offer of money is lower
You’re not wrong, except the part where the money becomes more real once you sell the stock. All assets are like this – if you lasso an asteroid that contains $45 umptillion of gold, you won’t be able to sell it for $45 umptillion because you’ll crash the gold market. Money has the same problem – when the money supply grows, everyone has less money per money, which we call inflation.
Same with money. If the power goes out the can of tuna in the cupboard suddenly is worth more dead president paper. Maybe it was worth a dollar yesterday. But 2 weeks into no power I won’t sell it to you for 5 dollars.
To be fair the very idea of value of money is “imaginary”. Even a bank note is nothing more than a promise.
The value of a stock is derived from the trust that someone will trade you for it. If the trust goes away, so does the value.
Similarly, the value of a bank note is derived from the trust that someone will trade you for it. If the trust in a bank (bank run) or government (scarce money supply, solvency) or economy goes away, so too will the value of money, i.e. inflation.
Even comodities and tangible goods have “imaginary” value, because these things can be under or over produced, which in turn changes how likely someone might want your good.
That being said, the degree of imagination needed to trust the value of trade varies, and stocks are definitely close to the top of the imagination tree.
The difference with stock being that if you have 1T monies, you can buy stuff worth 1T (after ice cream cones run out, buy a factory or switch to candy). With 1T of stock, you can’t.
No, but you can take a 2T loan using the 1T stock as collateral, and buy more things with the promise you buy it back.
And you can even use the 2T loan to buy out competitors or otherwise invest in that 1T of stocks. And when it’s worth 2T borrow 5T to pay off the loan and have 3T to invest.
Stock valuation has always seemed like play/imaginay money to me. Until I sell my stock and buy that large purchase, I treat mine like just a number.
Imagine you’re the richest person on the planet, and own 1 trillion monies in stock of Omnia Corporation. Can you buy 1 trillion ice cream cones for 1 money each? No, because you can’t sell 1T stocks without utterly devastating the stock price… But you sure can take a loan backed by this imaginary money. Boggles my mind.
I wish someone with economics background would correct my thinking.
I have a bachelors in economics and your pretty close except you’ve got realize that all money is like this. If you’ve got a us greenback in your pocket and if I decide it worthless to me, and you want something from me then all you’ve got is a small piece of art.
All value is just agreements between people and money is just a method of keeping track of favours owed that we worked out thousands of years ago. In the example of a stock, all a stock is, is an agreement between the company that issues it and its holder, that the company will do you a favour (give you some money, a dividend) some time in the future, and keep doing it every time they have some extra favours to hand out.
I may decide that the promise of those future favours are worth doing a lot of favours right now or only a few.
Right now everyone who buys and sells stocks doesn’t think a lot of companies aren’t going to be able to a lot of favours in the future so the value in the stock market has gone down. But that doesn’t mean a trillion dollars has disappeared it just means that the offer of money is lower
My simplified take is all money is commoditized promises. It works if people believe they will work. Doesn’t if they don’t.
You’re not wrong, except the part where the money becomes more real once you sell the stock. All assets are like this – if you lasso an asteroid that contains $45 umptillion of gold, you won’t be able to sell it for $45 umptillion because you’ll crash the gold market. Money has the same problem – when the money supply grows, everyone has less money per money, which we call inflation.
Dollars, dollars everywhere and not a cent to spend.
I don’t have economics background and think the same way as you do.
They just create money out of thin air.
Same with money. If the power goes out the can of tuna in the cupboard suddenly is worth more dead president paper. Maybe it was worth a dollar yesterday. But 2 weeks into no power I won’t sell it to you for 5 dollars.
The tuna in the refrigerator, on the other hand, is suddenly worth less. Where’s the consistency?
To be fair the very idea of value of money is “imaginary”. Even a bank note is nothing more than a promise.
The value of a stock is derived from the trust that someone will trade you for it. If the trust goes away, so does the value.
Similarly, the value of a bank note is derived from the trust that someone will trade you for it. If the trust in a bank (bank run) or government (scarce money supply, solvency) or economy goes away, so too will the value of money, i.e. inflation.
Even comodities and tangible goods have “imaginary” value, because these things can be under or over produced, which in turn changes how likely someone might want your good.
That being said, the degree of imagination needed to trust the value of trade varies, and stocks are definitely close to the top of the imagination tree.
The difference with stock being that if you have 1T monies, you can buy stuff worth 1T (after ice cream cones run out, buy a factory or switch to candy). With 1T of stock, you can’t.
No, but you can take a 2T loan using the 1T stock as collateral, and buy more things with the promise you buy it back.
And you can even use the 2T loan to buy out competitors or otherwise invest in that 1T of stocks. And when it’s worth 2T borrow 5T to pay off the loan and have 3T to invest.
You don’t need a business degree to know you are correct here. Someone whom may or may not be I has one though, and you are correct.