I've been thinking about the share market

[Clockwork]

I'm not too knowledgeable about it but I've been trying to reason it all out and this is what I've come up with. Would welcome feedback from those more experienced in these matters.


So lets assume I own a business and I want to expand that business, I see an opportunity to increase market or productivity but I need finance to do it. The best option would be provide the finance myself (as the owner) but assuming that I personally don't have the funds I can go to a bank for a loan or I can "float" the company and allow others to buy a piece of my action.

I'd need to start by determining what the company is worth, adding up the sum of its assets/liabilities and taking in to account its operating costs, turnover, profit history and projected profit forecasts some sort of financial whiz presumably can determine what the total value of the company is. An investor comes along with the necessary funds and agrees to buy into the business and receives a shareholding equivalent to the investment made.

The money invested is put to use as required and the company's value raises initially by the amount invested plus some arbitrary amount based upon the expected returns to be made and the desirability of the shareholding to non-investors. This in effect is reflected in the company's new share price.

Once the company's shares start being traded, future owners aren't actually investing in the company at all they are merely speculating that the dividends paid or the increased desirability of the shares will provide sufficient return to justify their ownership.


Now we hear a lot about how it's important for the economy to have a healthy share market and the Government would encourage savers to participate but it seems to me that what they are really asking us to do is speculate our money by buying and selling shares, which doesn't in itself actually go to the companies being traded and is not used to further expand their markets or productivity. As such the companies aren't actually worth any more and neither is the nation's economy nut as more investors enter the market, the finite number of shares will increase in value simply by the laws of supply and demand.

It appears to me that the only people benefiting from such a market are the astute speculators and the Brokers and Dealers, if and when additional money stops coming into the market and supply starts to exceed demand the share values will drop. The dealers will continue to make money but the share holders will see the share value start to decline below what they paid for the shares. They are in effect the looses in this. The companies trade on, paying their dividends etc... but many poor saps will have bought at speculatively high price and in effect will find themselves at the end of some sort of pyramid trading scheme where the dividends really don't match the return they should expect for the money they paid (note, I wont use the term invested because no real investment was actually made.)

The way I see it, this sort of share speculation serves no productive purpose for an economy. Maybe the Government should look to reform the share market to encourage more "Investment" rather than speculation. It occurs to me that one way to do this may be to reduce taxes paid on dividends and increase taxes paid on capital gains through trading rather than capital gains through "investing"

Also, when a company does want to invest to increase its profitability how often does it tap it's share holders on the shoulder and say "hey bud, how about stumping up your share in the capital needed for this investment" rather than running off the nearest bank. If you can't ante-up get a loan or sell your shares to someone who can.


Following this line of reasoning I can not see what productive purpose is achieved through share trading, can someone please enlighten me? Like I've said earlier, I have no formal knowledge of this business and I know there are some real Brains Trusts that contribute to this board so I'd love to hear critique or suggestions from those wiser in the ways of the share market.

[oneofsix]

I follow your reasoning and personally agree on a level. I understand that the way the companies 'make' money from the share market is the banks look on the shares as a company asset or something, therefore the more the shares are worth the more the company can borrow. Thanks to our tax system the best way for a company to spend money is to spend borrowed money. All an accountancy fiddle IMO.

This has the potential to be a good thread once someone that actually knows this stuff posts.

[imdying]

Even investment is speculation. If you change how people can get their money out of a company at a time when they perceive they need to, they'll just put it into overseas companies instead.

[Clockwork]

Even investment is speculation. If you change how people can get their money out of a company at a time when they perceive they need to, they'll just put it into overseas companies instead.

You have a point about the overseas share market but I'm not suggesting people can't buy and sell shares, just that its less productive than we are lead to believe and that we should find ways to encourage investment rather than speculation.

As to that language difference, may be that's part of our problem, we have no real way of expressing the difference between the two activities, yet the purpose of which are entirely different.

[Grasshopperus]

IIt occurs to me that one way to do this may be to reduce taxes paid on dividends and increase taxes paid on capital gains through trading rather than capital gains through "investing"

Company owners would stop paying themselves wages and instead would pay themselves via share dividends which would be at a lower rate than normal income tax. How would you avoid this situation?

And you forgot the fun part of American style company ownership.
1. Buy shares in a company
2. Sue that company for 'failing to maximise profit'
3. Settle out of court for more shares
4. Rinse-n-repeat until you own a controlling share.
5. Appoint new directors
6. Get those directors to load the balance sheet up with loans and other debt which you siphon off as dividends and bonuses for your mates
7. Sell company to some dunce.
8. Buy a small tropical island.

[Clockwork]

Most shareholders wouldn't be on the payroll and anyway as long as each share draws the same amount of dividend for all share holders then, fair enough.

As to your other points, surely that just illustrates what is wrong with the share market any why many of us lesser mortals would be wise to avoid such speculation.

[aprilia_RS250]

Companies list in order to access extra liquidity and access to further capital. It's usually at a higher cost vs. debt. Look up pecking order in capital management.

Share market serves as a center where investors can sell and buy their ownership interests in companies they own. Remember primary reason to start a company is to make a profit, investors get their proportion of this profit through dividends, reinvestment into company and share price increases.

Speculators... i.e. day trader or someone who know nothing about valuing a company and decides to invest based on a price chart.... They make f*** all of all investors. ACC, NZ super fund, kiwisaver fundies, AMP, Tower, One Path etc etc make up the bulk of the market. They're in no way speculators. They spend billions in employing people who know how to value companies, know all there is about the companies assets, competitive strength, the management etc. Not only that they usually provide a lot of free advice for these companies in order how to manage their capital structure, strategy advice, opportunities etc. Why? In order to induce a higher share price and a better return for their clients which they pay their fees for.

Day traders actually help the market by creating tiny bit of extra liquidity. No one knows a rich day trader hence why they probably never will pay tax

[Grasshopperus]

Most shareholders wouldn't be on the payroll and anyway as long as each share draws the same amount of dividend for all share holders then, fair enough.

But every small business will be setup like that. Owner/Operator as 100% owner. Looks like it would be a nice tax dodge.

[Clockwork]

But every small business will be setup like that. Owner/Operator as 100% owner. Looks like it would be a nice tax dodge.

Or you could limit the tax breaks to dividends paid on listed shares.


Thanks for the input aprillia_RS. I'm sure you are right about the high volume professional traders. I guess I'm looking at it from the point of view of the so called "Ma & Pa" investors (God, I hate that phrase) They are the ones being encouraged into the market but I suspect all that will do will provide additional fleecing opportunities for the market wolves. As I said earlier, I just don't see how simply trading shares will ever prove beneficial to the country's economy. I fear the additional money simply serves to inflate the share price rather than grow the productive base.

[avgas]

Oh goody. A proper investment topic.
Will be back here later - gotta work right now

[Winston001]

Companies list in order to access extra liquidity and access to further capital. It's usually at a higher cost vs. debt. Look up pecking order in capital management.

Share market serves as a center where investors can sell and buy their ownership interests in companies they own. Remember primary reason to start a company is to make a profit, investors get their proportion of this profit through dividends, reinvestment into company and share price increases.

Speculators... i.e. day trader or someone who know nothing about valuing a company and decides to invest based on a price chart.... They make f*** all of all investors. ACC, NZ super fund, kiwisaver fundies, AMP, Tower, One Path etc etc make up the bulk of the market. They're in no way speculators. They spend billions in employing people who know how to value companies, know all there is about the companies assets, competitive strength, the management etc. Not only that they usually provide a lot of free advice for these companies in order how to manage their capital structure, strategy advice, opportunities etc. Why? In order to induce a higher share price and a better return for their clients which they pay their fees for.

Day traders actually help the market by creating tiny bit of extra liquidity. No one knows a rich day trader hence why they probably never will pay tax

10 characters.

Clockwork - to understand how the sharemarket works, you need to differentiate between two types of buyers:

• 1.Traders who buy and sell hoping to make a profit, and

• 2. Longterm owners. People and investment funds which hold shares for years, sometimes decades.

Most of the noise you hear and read about sharemarkets revolves around traders who buy and sell in response to good news and panic. Despite the enormous amounts of money exchanged daily, traders only hold a small percentage of total shares issued.

The way to check this is to look at the number of shares traded on a rising/falling day and compare it with the average. The number will be above average but not 10 or 100x average. In other words, the amount of shares traded each day is a fraction of all the shares issued which tells us that most owners do not buy and sell.

Just as you do not buy and sell your house each day, most shares are held for the longterm. But there are a few people who try to trade houses and similarly some trade shares.

[Clockwork]

I accept what you say, but I am still questioning how share trading serves the greater economy. I realise that it is desirable for us as a nation to save and invest in the countries productive base but apart from the initial floats it seems to me that trading shares doesn't really do this. If we amateur investors simply pile in there with our spare savings the share values will increase simply by the laws of supply and demand without improving the productive capacity of those companies traded one jot. Indeed we stand to loose our savings to the more savvy traders out there!

That said and unless someone can explain to me why the above view point is incorrect, I'm just as keen to hear ideas about how things could be improved, whereby our savings actually will be invested in productive ways. For instance as I mentioned above may be "floated" companies should receive tax incentives to encourage investment. Or perhaps a nation full of self employed entrepreneurs paying less tax through their unlisted "company holdings" is a desirable outcome.

Perhaps a capital gains tax could be levied on gains made simply through share price fluctuations but then that tax rate diminishes over a term (say 10 years) thus encouraging long term investment/ownership and refocusing company owners on long term business strategies.

[Winston001]

To give you a live example, I still hold shares in ANZ and Fletcher Building (Fletcher Challenge) which I bought in 1980 when I started work. 30 years ago.


Why do we have sharemarkets? Liquidity and for raising new capital. For example, Contact had a new share issue at $5.05 a few weeks ago when the market price was $6. It was cheaper for Contact to raise $350 million by issuing new shares than borrowing from the bank. Interestingly Contact shares dropped to $4.90 a few days ago so the new shares weren't much good for traders...

Liquidity: your engineering mate needs an extra $50k to set up his new business so you take a 25% share to help him out. Three years later your daughter needs an expensive medical treatment overseas and you tell your mate you want the money out. He can't do it. You are stuck.

However if your mates business was publicly listed on the sharemarket you'd be able to sell your shares. You might make money, you might lose money, but at least you have a market to sell in. Being able to liquidate your investment is a very attractive reason to hold shares. By contrast selling your house takes months.

[Naki Rat]

An interesting point made by Michael Lewis in his book The Big Short is that ALL investment is essentially a gamble. You give someone your money and at some time in the future you expect to get it back together with some (winnings) interest. The extent of your winnings (and the likelihood of being reunited with the principal) are related to the length of the odds you are prepared to agree to. From government bonds on one extreme (US treasury bonds ?? ) to sub-prime mortgage bonds on the other you pays your money and you takes your chances

The Big Short gives a unique insight into the dealings that led to the global credit collapse of 2008, and continue to affect global financial markets. It is downright frightening to read what incompetance and fraud exists in the upper levels of world financial markets, and by embarking on a foray into the stock market you stand to become a pawn to such traders.

[Clockwork]

I'm not questioning the purpose of the share market, I just don't understand why it is lauded as the driving force behind the country's economy. I think the rights issue is great, as with he initial float it allows new money to enter the market with a productive purpose. In fact I would have thought that such rights issues would be the first port of call when a company wants to raise capital, rather than the Bank.

Maybe there too, there is an opportunity to modify market behavior to favor of this sort of finance raising rather than borrowing from overseas owned banks.