The Stock Market

The stock market is getting a bad rap these days. As I wrote last week, the recent relative success of the stock market is used as evidence of a growing rift between the fortunes of rich people and poor people. This rift gives people more confidence that they should do something with stocks to rectify the problem. Some politicians want to take stocks or the income from stocks away from the rich and distribute them to the poor. Or better said, they want to tax them to death and redistribute the proceeds through government.

Last week I pointed out that stocks are not owned just by rich people. Many of us less than rich persons own stocks and thus a lot of stockholders would be impacted by whatever is done to make stocks less valuable. I won’t repeat that information.

There is more to say about stocks. Stocks are created by companies. They are pieces of paper. They are pieces of paper that take on value because they promise the owner of that piece of paper a dividend. What does it take to get a dividend from a stock? Unlike an interest payment that is legally promised on a bond, a stock dividend is as gotcha. The promise is that if the company has a good year – it will pay dividends. If it does not have a good year, then it might pay a small dividend or maybe even nothing at all.  

Thus, buying and holding a stock is a risky thing. We hope that the company will do well so that we get a nice juicy dividend. Another aspect of a stock is that it has a price. The price is set each day for stocks through the interaction of supply and demand. If word gets out that a firm is doing poorly, then the market price of its stock might fall.

Ugh. If the firm is doing poorly you might not get a dividend AND if you want to sell the stock, you might have to accept a lower market price and thus take a loss on it. Clearly, stocks are risky businesses. Why do so many people and retirement funds want to buy stocks if they are so risky? Answer – they are optimistic that firms will do well – stock prices and dividends will rise and the owners of the stocks will get richer. No matter your income from work, if the stock market rises, you get richer. It’s a gamble – because you don’t know if firms will do better or worse in the coming weeks and months.

But still, stocks are risky. Right, and that’s why a lot of people are very careful in how they use their saving. Aha – the world “saving” just snuck in. Most of us save.

Okay, not all of us save. I have some friends with high incomes and they manage to always spend more than they earn. They have negative saving – or what we refer to as borrowing and debt. And then there are a lot of people who cannot save because they don’t earn enough to even provide for a meager standard of living.

But national saving is a big number. Some of it just ends up in our checking accounts at the end of the month – or maybe our saving accounts. Or maybe we buy a certificate of deposit. Or maybe we buy a government bond … or a corporate bond. Or maybe we buy paintings. There are lots of ways to save. Stocks are just one of the ways.

It makes sense that people, rich or not, want to save and use some of that money for stocks. But why do firms want to sell them? Mostly because they need the money. The main idea is that a company might not generate enough revenue to pay more than wages, rent, intermediate goods, and so on. If they are going to be more successful in the future, they may want new equipment, a larger office building, better cars for the salesforce, etc. They can get that investment capital from a bank, they can borrow it by selling bonds, or they can ask you to be an owner of their stock. Whichever they do, the end result is that firms look ahead and try to be more productive.

So what? We want to save as a nation, and we want to buy stocks. Firms need money, so they sell stocks.

Simple. There is a reason for the stock market, and there is a reason we want it to be healthy with lots of transactions and with rising prices and values. People want good options for their savings and firms want to find lots of money to use for growth. 

The stock market is not the reason there are poor people. Killing the stock market will not stop or reduce poverty. Having a viable stock market means we funnel good savings into companies who can use it to grow, be stronger, and hire more people along the way. That might not end poverty but surely it won’t help if attacks on the stock market hinder firms attempts to grow and thrive. There are other and better ways to reduce poverty.  But those ways are neither quick nor easy -- maybe that's why some politicians would rather speak loudly and unkindly about the stock market.