Why isn't anyone discussing what is going on?
- Thread starter NTB
- Start date
Ok, so let's keep this simple. Let's use futures as an example because it's clean. I buy an sp 500 futures contract at 1700. I sell this contract to you. You are short this contract. No matter which way the market goes, up or down, and by whatever magnitude, the net affect of our wealth as an aggregate stays the same. Say the sp drops 5 pts. My account is marked at 1695. I am down 250 dollars correct. You account is marked at 1695, you are up 250 dollars. The sum of our wealth will always equal zero (250-250=0). My loss is your gain. If the sp dropped 500 pts. My account is marked down 500, yours is marked up 500. The change is always zero. It has to be zero as it is guaranteed by the clearing house through margins both you and I put up. Do you understand?
Thank you for the explanation, however, while futures are a zero-sum game, equities are not. I appreciate the helpful spirit in which you approach the discussion, however, I will respectfully disagree. Ultimately, the company issuing the stock is on the other side (sell side) of the trade and they are not subject to mark to market on stock that they issued because they are holders of the underlying physical asset (the company). When a company goes public, the company is the seller and the investors are the buyers. The company does not lose wealth when the stock goes up however, wealth is created for the investor. Conversely as stocks go down, companies issuing stock do not benefit while investor wealth is destroyed. This is what I believe. 
Quote from NTB:
Thank you for the explanation, however, while futures are a zero-sum game, equities are not. I appreciate the helpful spirit in which you approach the discussion, however, I will respectfully disagree. Ultimately, the company issuing the stock is on the other side (sell side) of the trade and they are not subject to mark to market on stock that they issued because they are holders of the underlying physical asset (the company). When a company goes public, the company is the seller and the investors are the buyers. The company does not lose wealth when the stock goes up however, wealth is created for the investor. Conversely as stocks go down, companies issuing stock do not benefit while investor wealth is destroyed. This is what I believe.
No, here is where you are wrong. Let's use GOOG as an example. GOOG goes public at $50 a share. Ten million shares are sold to the public at $50 a share. Let's say the public is one guy named John Smith. John Smith is the proud owner of 500 million dollars worth of GOOG stock.
Where does that money go? Well, some of that money goes to the underwriters in fees. Some of that money goes to the Goldman brokers in the form of commissions. The rest of that money goes to GOOG. That's right, GOOG get's 500 million minus the fees.
So now let's say GOOG stock goes to zero. What happens? Well, John Smith is out 500 million dollars. But GOOG has that money now. The money never disappeared. It went to GOOG. What did GOOG do with it? They invested the money into technology. Say they put all the money into an algorithm company to develop some technology. Now what did they do with that money? They used that money to pay their employees. Where does that money go now? They used it to buy their wives a new car. Now the car company uses that money to pay their employees. And on and on we go. The money never disappears, it simply gets transferred to another party. Do you follow?
I understand. Using your example, if the stock goes from 50 dollars to 100 dollars and John Smith hasn't done anything with his stock, has GOOG lost $500 Million on the upmove in the stock? Who has lost? John Smith has gained $500 Million on a mark to market basis. Has wealth been created or has Google lost an equal $500 Million to what John Smith gained?
NOOOOOOOOOOOOOOOOOOO! LOL.
Someone had to buy the stock. Let's say the next day good old Maverick comes in to buy some GOOG and the current offer is $100. Let's say Goldman now upgrades the stock so we have ourselves a gap here. I'm all excited and I lift the offer at $100. Now, the gain you have on paper comes at MY expense. I paid $100 for the stock. The only way John Smith can realize his gain is if I transfer my wealth to him. Say he sells me all his stock. The money he is walking away with came out of MY pocket! It didn't just appear out of the blue. LOL. If GOOG goes to zero now, the net effect of all the aggregate dollars is still 0!!!!!!!
I am out 1 billion dollars. You made 500 million and GOOG made 500 million. The net effect is ZERO!!!!!!!!!!!!!!!!!!!!
So the unrealized gain that John Smith had on his GOOG stock when it gapped to $100 did not figure into his wealth until he sold to you (in your example) and monetized the wealth? What would have happened if John Smith owned all the stock and the stock opened at 100 bid with no offer and no trade. John Smith wouldn't be any wealthier until he sold the stock? Does this also mean that Bill Gates isn't really as wealthy as claimed because he hasn't actually sold his MSFT holdings?
Quote from NTB:
So the unrealized gain that John Smith had on his GOOG stock when it gapped to $100 did not figure into his wealth until he sold to you (in your example) and monetized the wealth? What would have happened if John Smith owned all the stock and the stock opened at 100 bid with no offer and no trade. John Smith wouldn't be any wealthier until he sold the stock? Does this also mean that Bill Gates isn't really as wealthy as claimed because he hasn't actually sold his MSFT holdings?
Correct. It's the same thing with homeowners. If my house has doubled in value, the gains are all on paper until I sell the house. Think about it. If the stock gaps to 100 and no trades take place, how can I say what I am worth? It's all a paper gain.
Bill Gates and many others net worth are tied to their assets. All their assets. These assets fluctuate in value every day. Gates's net worth fluctuates every day with the price of MSFT stock. In 2000, there were many young geeks worth millions on paper. Many of them never realized those gains (transferred someone's else's wealth over to them). Their stocks went to zero and were no longer worth millions.
The problem becomes exasperated when people start to borrow against their inflated assets be it stocks or their homes. Again, money is transferred here in the form of debt. Rest assured, the money is very real and someone is on the hook for that.
I follow the futures example but the stock market does not work that way.
In the stock market everybody thinks they can exit at some specific price usually the last close and imagine they have the money.
Of course that wealth effect is just an illusion because obviously everybody can't exit and get that price.
In the stock market everybody thinks they can exit at some specific price usually the last close and imagine they have the money.
Of course that wealth effect is just an illusion because obviously everybody can't exit and get that price.