Grillick wrote:Kitten, your two paragraphs describing corporate investing say the same thing, essentially.
Moreover, the first one is an accurate reflection of how most people approach stock ownership.
Not so. The first approach represents a true investment - giving capital to a company in return for a share of its profits, and a say in how the company is run.
However, many stocks nowadays do not pay dividends. Some do not even offer voting privileges. You buy what is essentially a worthless document, one that has no promised share of company profits attached, with the sole intention of holding it until the value increases. Normally, one would expect the value of a stock to be tied to the company's projected earnings, since the shareholder would be receiving a portion of this; but in the case of stocks that do not pay dividends, this connection is purely psychological. Prices fluctuate seemingly at random based on peoples' predictions of what the price will be next month, or week, or hour. And these predictions themselves are not about foretelling changes in the value of the company, but the sentiment of other investors. The day-trading mentality emerges.
It is true that many people handle stocks according to the first philosophy, but many individuals and large investment banks practice very short-term trading, and many of the stocks being traded are, for all practical purposes, worthless. They do not carry the traditional share of company profits. Even the values of those that do are only loosely based on the predicted returns coming from dividends.
As an example of the problems with buying worthless goods based on the assumption that everyone else values them highly and prices will continue to rise, I cite Holland and its former tulip market. Also the dotcom boom, the recent housing bubble and indeed most of the major economic crises that have ever taken place.