Free Speech: Do We Really Have It?

[KITTEN III]

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.

[Jorodryn]

That's a tricky question to answer. I have no problem with the general idea that "these things belong to me, those things belong to him". I can kind of accept the idea of private ownership of things like land and buildings, as long as it's people owning things and they don't own too much and they're not just owning it to keep it locked away from other people for no real reason.

My question to you though is who determines what is too much. Too much to you and too much to me are probably vastly different things. I have no problem with someone owning 20,000 acres of land for their personal use or even for use to make food, or as some other business asset. Sure we could let the majority decide, but what happens then? The majority decides that no one needs more than a half acre of land tops. I guarantee that is not suitable to everyone.

I own things that I don't use. I have a banjo. The intent was to teach myself how to play it. I still intend to, but currently it sees no use. My keeping it is not intended to keep others from having it, but I'm not taking the time to practice right now. Even better example. I own a commercial building. I do not have the funds to renovate it currently. I intend to do so once I have the cash. I want it as another income stream at some point. My intent is not to possess it so others can't, but currently I have no way to do anything with it. I could sell it, but that is counter to my current goal. Although it may come down to selling it in the end. How does that fit into your ownership criteria?

[OldCrow]

90% of options on movie rights are never excercised, just to prevent competition.

I guess I'll give you that one...but I'm not entirely sure options on movie rights really fits the definition of an asset.

That said, the stock market as it exists today is a patently illogical system.

You're right. They should make insider trading legal and stop trying to think of ways to make short selling illegal.

[KITTEN III]

I have not heard of any recent efforts to outlaw short selling. Current rules merely restrict its use. They do this because unrestricted short selling adds a lot of volatility to the market, and has the potential to cause massive plummeting of stock prices.

What good would removing these rules have? Do you think borrowing stocks with the hope that their price will decrease is a useful practice that contributes to the market, or to society?

[Grillick]

They do this because unrestricted short selling adds a lot of volatility to the market, and has the potential to cause massive plummeting of stock prices.

I'm sorry, can you please explain to me how letting an unlimited number of people bet that a stock will go down in price actually makes it more likely to go down?

[KITTEN III]

I'm not sure if that's sarcastic or not.

First of all, in a market, no action can be considered independent of the rest of the system. Put simply, if you're an investor and you see a bunch of people predicting a stock will go down, it will most likely affect your buying and selling of that stock to a considerable degree.

And, vastly more importantly, short selling a stock does not consist of placing a "bet". It's the practice of borrowing a number of shares of stock from a broker (or other third party), selling them, and hoping the market price goes down so that you can then buy back the shares at a lower price and pay them back to the broker, pocketing the difference.

And yes, vast numbers of people selling a stock absolutely drives the price down.

[Grillick]

Firstly, short-selling requires the presence of a willing third-party. This you have clearly acknowledged.

Secondly, the "sale" of the stock by a short-seller comes with a coexistent obligation to buy the same number of shares of the stock.

Thirdly, brokers are required to report the number of shares that have been short-sold, making information about how deeply "shorted" a particular stock is publicly available.

Fourthly, the existence of these outstanding obligations to purchase stock make the stock more valuable as more obligations are taken on, not less.

Yes, the actual act of selling the stock initially drives down the prices a bit in the short run, but the only way these activities will have a long-term effect on the price of the stock is if the company is not profitable on its own.

In fact, allowing unrestricted (but necessarily publicized) short-selling may well be a good way to keep the stock market doing what you'd like it to be doing, instead of running primarily on speculation.

[LeoChopper]

And, vastly more importantly, short selling a stock does not consist of placing a "bet". It's the practice of borrowing a number of shares of stock from a broker (or other third party), selling them, and hoping the market price goes down so that you can then buy back the shares at a lower price and pay them back to the broker, pocketing the difference.

Unless you think selling a stock counts as betting it will go down, with someone who is buying and so betting it will go up. If it wasn't gambling, why would knowing too much about what you're trading be illegal? That's all insider trading is.

[kirby1024]

I have deep, serious problems with what passes for "investment" these days. I take issue with the idea that "providing capital" is an actual job and disagree with the assertion that it provides a value service that should be compensated. If I give you $20, and you use that $20 to somehow make $100, I have no right to expect anything more than my $20 back. If I want part of the profit you made on the endeavour you started with that money, I should have to play some role in its execution aside from "giving you $20". To do otherwise merely encourages the creation and propagation of a class of people whose only function in society is "having money" - I find that function more than useless, but actively harmful to society.

So it's more the idea of Ursury that you have problems, with, rather than complex ownership?

[KITTEN III]

Yes, the actual act of selling the stock initially drives down the prices a bit in the short run, but the only way these activities will have a long-term effect on the price of the stock is if the company is not profitable on its own.

In fact, allowing unrestricted (but necessarily publicized) short-selling may well be a good way to keep the stock market doing what you'd like it to be doing, instead of running primarily on speculation.

I was not claiming that short selling should be illegal. And furthermore, the problems I was outlining with the practice were not about its potential to keep stock prices down long-term. It was about volatility, and unrestricted short selling carries the potential to drastically increase the effects of sudden downturns.

Short selling in of itself is not a bad thing, and can, as you implied, help correct overpricing of stock. The problem arises when people are allowed to short stock that is already in a downward spiral, which can push the price much lower much more quickly.

As far as I am aware (and this knowledge may be slightly out of date, I can look it up later), the current restrictions on short selling merely state that you can only short stock when its last price movement was positive. This is simply designed to prevent investors from shorting a stock when it is already performing badly, the cumulative effects of which can be very negative. It is not a large restriction and should not interfere with most attempts to short a stock that is, in fact, overvalued.

Unless you think selling a stock counts as betting it will go down, with someone who is buying and so betting it will go up. If it wasn't gambling, why would knowing too much about what you're trading be illegal? That's all insider trading is.

Sorry, perhaps I wasn't clear. I wasn't trying to say that speculating in stocks isn't very similar to gambling - it is, and the derivatives market is more or less exactly gambling. I was objecting to Grillick's question about how betting that a price will go down will cause it to go down, which implies that short selling is merely placing a bet on an outcome without actually trading the stock. It's not; it involves the buying and selling of actual securities, which affects price movements considerably.

[FreakyBoy]

So it's more the idea of Ursury that you have problems, with, rather than complex ownership?

I have a problem with usury too. It's not an either/or.

Jorodryn: by owning that building when you can do nothing with it, you are holding it expressly so no one else can use it until you can or feel like using it. The property must sit idle because you can/will not do anything with it, instead of allowing it to go to someone that can/will. How can you possible see that as a positive thing (except maybe in a self-centred "good for me" way)?

As for "who does that sort of thing", lots of people around here buy land just to have land and go through a lot of trouble to keep other people off that land, despite having no plan or ability to do anything with the land.

On the other hand, if you buy some land, can't do anything with it, but don't put any effort into making sure other people stay off it and don't use it? I don't have a problem with that.

[Stan Cold]

Now, I own a large patch of grass with just a porch on it and I use it for the explicit purpose of telling kids to get off my damn lawn. Would that work in FreakyBoy's America (which in my opinion seems way better than Sean Hannity's America)?

[Jorodryn]

If someone were to offer me a price I'm sure at this point I would sell it. Although I would rather be able to fix it up and rent it out.

[FreakyBoy]

Now, I own a large patch of grass with just a porch on it and I use it for the explicit purpose of telling kids to get off my damn lawn. Would that work in FreakyBoy's America (which in my opinion seems way better than Sean Hannity's America)?

Only if it becomes a hang out for older gay gentlemen.

[Kea]

Quite apart from everything else that's been said here, if certain corporations manage to have consistently huge profit margins over a long period of time, that indicates that something fishy is probably going on. See, in a perfectly competitive free market system, profit margins don't get very large. Market advocates are forever going on about how competition is a good thing because will lead to lower prices; they never seem to take this to the logical conclusion that it will also result in smaller profits.

If a corporation manages to rake it in hand over fist for a surprisingly long period, and pay its executives obscene bonuses to boot, that's generally an indication that competition isn't working properly. Or that what the corporation is doing isn't so much offering a useful product or service for an attractive price, but acting as a middleman (or what we call a rent-seeker). Rent-seekers find an inefficient point in a market (usually some kind of information bottleneck) sit on it, and then skim a toll off all those wanting to pass through.