Investors, Speculators and the Stock Market - Part 1
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by: Guest
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Word Count: 1900
The foundation of Capitalism is the auction process of exchanging property.
Every owner desiring to sell a product will make it available to all potential buyers and strike a deal with the highest bidder.
Even our daily purchases at the supermarket or department store are an auction.
When we want more of certain goods or services, the asking price is raised until the competition amongst those who want to consume does not increase above the available supply.
Our willingness to consume or not consume throughout the year is our expression of our bids for goods and services.
Brokerages also have employees and/or self-employed stockbrokers around the country who receive buy and sell orders from their customers, and relay those orders to their exchange broker who alerts the specialist that is responsible for the particular stock that is wanted, or offered for sale.
The buying specialists group together, facing the selling specialists, prices to sell are announced and bids to purchase are made, with each side making some adjustments until trades are made.
Originally stocks represented ownership of a company in the sense of equity, wherein the original sale of stock was insured by the collateral of manufacturing facilities and equipment, so that in the event a company went bankrupt, the stockholders would be somewhat compensated by the sale of buildings and equipment.
They use company assets as collateral for those loans or bonds, which offers some protection to banks and bondholders and none to stockholders.
If a company has assets worth ten million dollars, and one million shares of stock are owned by the public, that stock is protected to a price of ten dollars per share.
Its price has been inflated in a careless and economically dangerous manner.
Bankruptcy for such a company would result in a total loss for stockholders.
Speculators are people who bid to own, or offer to sell all sorts of stocks, bonds, and commodities, without holding stocks to receive dividends, or holding bonds to maturity, or taking possession of commodities to produce consumable products.
Speculation does not drive or strengthen the economy; it only feeds off the wealth of the economy.
They have become institutionalized in our commercial real estate, bond, stock and commodity markets.
Political power is manipulated to regulate these investment markets for the benefit of speculators.
These changes in stock values are brought about more by the activity of speculators than by economic activities of production and consumption.
Speculation often drives many stock values way above or way below real current market values and earning capacity.
As the markets oscillate, speculators buy and sell to siphon off a portion of the flow of investment dollars coming at the markets.
Many corporations are now more interested in how their stock price is viewed by speculators than by investors.
These higher prices tend to discourage speculators, who want to own lower price stocks, which are usually more volatile, allowing them to skim profits off that volatility.
"The market is always right," investment brokers, referring to the value of stocks, bonds, and commodities often quote this statement to customers; hoping to impress them with a belief that the markets reflect overall attitudes of investors and speculators.
Therefore, the markets are actually low as far as buyers are concerned, and high as far as sellers are concerned.
The fact is, the markets are always changing.
The market is only right when and if it stagnates with no change.
Forehand knowledge of information that will affect the value of a stock or bond is illegal, and is called insider trading.
Though there is great diversity of opinions about the meaning of corporate data, still all players must have equal access to that data.
Today stocks are traded 24-hours a day; over the phone between customer and broker, via computer between brokerages, and on numerous stock exchanges around the world.
Now that brokerages can buy and sell stocks via computer, orders to buy and sell can be processed with lightning speed.
Standing orders to buy or sell at certain price levels tend to exaggerate the volatility of the market.
Many investors and speculators buy stocks on margin (partial payment), paying only a portion of the cost.
If investors do not respond to the margin call for additional money, their brokerage will sell their stock at any price, without their permission, and send them a bill if the brokerage had to pay the difference between their customers' down payment and the selling price.
While your broker is trying to get you the best deal available, you are actually competing with your broker's company to buy and sell stocks.
So if you want to sell a stock that their chief strategists believe is going to go up, they will not necessarily inform you.
Likewise, if you want to buy stock that they believe is going down, they will tell you so if they don't own any, or they will sell you theirs and remain happily silent.
In that case your brokerage will sell or buy a number of stock orders through the same specialist at the same relative time, and yours will be the ones with the least gains, making the ones with the most gains their trades.
Each stock transaction determines the value of all of the stock for a company.
And though many investors do not buy or sell on a daily basis, they still watch their stocks and note how their perceived net worth has increased or decreased as their stocks move up or down.
Only a small percentage of any company's stock needs to be placed on the market and sold at any price to wreak havoc in the value of all of that particular stock.
By this I mean, if more of its stock is offered than the market can find buyers at any price, the value of all of that company's stock falls to zero, (no demand, no value).
Barring some catastrophe in the world in general, or some segment of our economy in particular, a stock's equilibrium is established by its previous day's activity.
But since it is buyers and sellers who define this equilibrium, the ratio of buyers to sellers is very important to the value of a company's stock.
But there are only a finite number of buyers and sellers; both sides draw from the same pool of speculators and investors.
If sufficient pressure to sell stocks at any price occurs, even if only in one sector of the market, it can attract cash from other sectors, consume that capital and thereby reduce the cash available to support values in other markets.
As new prices are established at lower levels, equity is lost across the board, both for sellers and for owners who remain on the sideline hoping for stability.
The loss of capital to investors in those other markets will cause prices to fall for them as well.
This was not only a result of it being impossible to get through to your broker by phone, since many thousands of other investors were doing as you were.
It could sell its own stock first and consume what little demand may have existed to buy stocks, and it could keep your stock off the market to prevent prices falling even lower.
There is a method of selling stocks and commodities in our economy that is called selling-stock-short or short-selling.
In essence we borrow stock from some investor, through a broker, and we sell that stock to a third party because we believe that its price will fall in the future (we are selling short because we are short the amount of stock that we have borrowed and sold).
If our gamble is right and the price of that stock or commodity does fall, we can then buy that stock back from a fourth party at the lower price and return it to the person or brokerage we borrowed it from.
The history of selling-short is the most calamitous in all of our economic history.
Then they would put out rumors that caused other investors to also sell that stock, driving the price very low, which would allow them to make large profits by buying back that stock at a lower price and return it to the brokerage they had borrowed it from.
The company that issued that stock may have other shares held as collateral for expansion loans.
If a company had cash assets that would allow it to buy up these short sales as they occurred, it would not only support the price of their stock, but as less and less stock was available for investors to own, the price of a company's stock could rise.
This would create demand for a reduced supply, causing the price to rise and possibly catastrophic losses for those who had sold short.
There have been many stock panics in our history and all of them have been worsened by selling-short.
If this stock is managed by a brokerage for that investor-A; the brokerage could loan that stock to speculator-B, who would sell it on the market to speculator-C.
But since speculator-B is borrowing and then selling this stock, he is helping his own gamble by adding this borrowed stock for sale to the market, thereby encouraging a price decrease simply by increasing supply.
In essence the brokerage has aided and abetted a loss to one of its investor customers, while helping a speculator customer profit.
So why do stockbrokers offer short selling? Simply to make money; stockbrokers earn a fee each time stock is traded.
They want the fees associated with trades and market volatility, and they are happy to help speculators hurt investors.
There is a big difference between investors and speculators.
They hold stocks for years to receive dividends as a return on capital investment.
They buy commodities and use them to manufacture goods and provide foodstuffs.
Only a speculator would sell a stock or commodity short.
Only a speculator would take an option to buy stocks, or sell stocks, rather than commit fully.
When earnings reports are low or below market expectations, many stocks fall in price rapidly and somewhat drastically as speculators dump those stocks knowing that with bad reports other speculators will sell such stocks and others will temporarily choose not to buy.
So speculators will move out early, and even sell the markets short to accelerate a decline brought on by perceived weakness, and reap profits for themselves thereby.
If this were the case we would have daily panics and weekly chaos.
How can a stock, which returns a 4% quarterly dividend to a market that was expecting 5%, have its price drop 5% or more in one day? In the opposite case, the stock price might rise 5% in one day on a dividend of only 1% above market expectations.
Only speculators can do this, because speculators are working a pure gamble, based on near term strength or weakness of companies.
Part_2 is also on this site, or will be shortly.
Hanks
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