Author Topic: Where does the money come from? Another naive question.  (Read 1532 times)

pecunia

  • Pencil Stache
  • ****
  • Posts: 984
Where does the money come from? Another naive question.
« on: August 28, 2018, 08:06:57 AM »
The Stock Market went up yesterday.  I am happy that it did because it means it may mean I am closer to retirement goals.

As I understand it, for the price of the shares to go up, someone must be selling their shares to someone else.  The rise in the stock market means they are on average selling for more than they paid for the stocks.

I have most of my money in stocks.  I think a lot of people have most of their money there because other than real estate, there is no value to having it elsewhere.  To pump the value of the stocks up, somebody has to have money to keep pushing the stock prices up.

I used to think that stock prices reflected the societal value of a business.  I have long been corrected of that false notion.  It is not real production that is causing the stock prices to rise.  Iím quite sure output of the economy is not matching the rise of the stock market.  I do not think that the good business climate is causing this rise.

Peopleís pay may have gone up a gnatís hair in the past few years and more people are working.  Yet, I donít think people are taking their pay and buying stocks to drive these prices up.

Can retirement savers be pushing these prices up?  The word is most donít save much for retirement so I doubt whether weekly or monthly retirement contributions are doing it.

Some of this rise is that companies are buying back their own stocks.  How long will this last and what effect will it have?

Are foreign investors investing in the US due to uncertainties in their home countries?

Some will say this is the ďnaturalĒ business cycle and the behavior of the stock market is to be expected.  Sorry, I donít see it as ďnaturalĒ like the seasons or gravity.  It is the creation of people.  Itís an artificial entity.  Market forces are not like physics.

There are a lot of very smart people who read these posts.  I hope one will give me a simple clear explanation to my following question.

Iím not out to kill the golden goose, but where is the money coming from that keeps pushing up stock prices?

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Where does the money come from? Another naive question.
« Reply #1 on: August 28, 2018, 08:09:30 AM »
Sort of a basic article, but I think where some of it is coming from is out of the Treasury's coffers.

https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/2018-04-03/how-tax-reform-affects-stock-value

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2388
Re: Where does the money come from? Another naive question.
« Reply #2 on: August 28, 2018, 08:10:20 AM »
Some of the money comes from new earnings that are then paid to employees.

Some of the money comes from government, who pays for things from businesses or people or banks.

Some of the money was sitting in bonds or other instruments, which are sold in order to buy stocks.

Most people don't realize that the $30 trillion market cap of the American stock market is dwarfed by the American bond market, which is much, much bigger.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Where does the money come from? Another naive question.
« Reply #3 on: August 28, 2018, 08:22:42 AM »
Adding to tall texan, some rises are due to companies with good profits that do not see enough opportunitiy to reinvest the profits, so they buy back their own shares and retire them.  This increases the value of the remaining shares.  Also, a lot of chinese profits are having to go somewhere and wealthy chinese trust western stocks more than their own, so it is buy more for the near term. My analysis suggests boomers saving for retirement, foreign investors, good profits via automation, 1% ers having more but nowhere to spend it other than reinvest, and corp buybacks are fueling this rally.

PS. your 'impressions' that the market is not valued properly are very unlikely to be grounded in well researched facts.  Very little good information about the assets, liabilities and true prospects of all companies flow into the measures quoted by the financial media.  The value of alkl public company brands, property, human resources, ideas, data, etc are very difficult to measure, so the market is really only our best guage.
« Last Edit: August 28, 2018, 08:27:03 AM by PizzaSteve »

pecunia

  • Pencil Stache
  • ****
  • Posts: 984
Re: Where does the money come from? Another naive question.
« Reply #4 on: August 28, 2018, 02:36:51 PM »
Good answers

Onlykelsey, I read the article and it does give credence to the tax cut and stock buybacks being a good part of it.

TallTexan - I had no idea that the bond market was so much larger.  I can surmise that continuing good returns from stocks would attract some of that money away from the bond market

PizzaSteve - My impression s not grounded in facts just drawn from what I see around me.  I do not see a "boom" in American industry so I assume that the continuing rise in stocks do not arise from the growth of business.  However, that is only my impressions.  My observation window is narrow and I certainly am not well grounded in the subject matter.  So you are correct.

I find the statement interesting that wealthy Chinese would rather invest here than in their own booming nation.

Thanks

Scortius

  • Bristles
  • ***
  • Posts: 452
Re: Where does the money come from? Another naive question.
« Reply #5 on: August 28, 2018, 03:37:53 PM »
I think it's even a bit simpler than that. There isn't actually any 'real' money that appears when stock prices go up. Rather, the immediate value of a stock is the value that you can ideally sell it for. That value is directly related to the largest amount of money someone is willing to pay for it. Thus, if someone new enters the market and looks to buy a share of Amazon for slightly more than its immediate value, then your single share of Amazon just rose in value because you can now sell it for more money (this is simplified of course). At no point did more money enter the system, rather, a higher bid arrived which now supports a higher price.

The trick is that companies are often valued (market capitalization) by taking the number of shares they have and multiplying it by their current price. But, that price may only be supported by a smaller number of purchase orders. Even if he wanted to, Bezos could not sell all his Amazon stock at the current price. Once he fulfilled the purchase orders of the highest bidders, only people willing to buy at a lower price would remain. The stock price would drop and so would Amazon's market capitalization.

Index funds are simply a larger form of this same concept. One share of an index fund is somewhat equivalent to a bunch of small shares in a large number of companies. If you sell a share of your index fund, you are really selling your very small share in each company represented in your fund. If people are willing to pay higher prices for those companies, you can sell your share for more money, making it worth more, which is reflected in your investment account balance. Thus, if more people show up willing to buy stocks for more money than they are currently trading for, the overall price of the market goes up because you should be expected to sell your holdings for more money. There is no 'real' money being added to the system beyond people entering the market willing to pay you more for your shares than the day before.

fattest_foot

  • Pencil Stache
  • ****
  • Posts: 652
Re: Where does the money come from? Another naive question.
« Reply #6 on: August 28, 2018, 03:43:26 PM »
There's actually a great video on just this topic (might be a bit longer than you wanted)!

https://www.youtube.com/watch?v=2nBPN-MKefA

The tl;dr version is, every time new debt is created, so too is new money. Consumption (loans) therefore drives new money into the system.

Cache_Stash

  • Bristles
  • ***
  • Posts: 297
Re: Where does the money come from? Another naive question.
« Reply #7 on: August 28, 2018, 03:56:48 PM »
Overtime the increase comes from increases in productivity.  Nowhere else.  Everything else (like government) is a drain on productivity.

Very basic answer and there is much more involved, but this is the main gear in the economy.

hendrickj

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Introduction to personal finance in link
    • Personal finance one-pager
Re: Where does the money come from? Another naive question.
« Reply #8 on: August 28, 2018, 04:10:40 PM »
The price of stocks represent the value of the equity share you hold in the company, and is therefore a percentage of the company's value.
There are a lot of factors involving a company's valuation: its real assets, growth, current and future income.
As these factors change, the price will be affected.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Where does the money come from? Another naive question.
« Reply #9 on: August 28, 2018, 04:25:47 PM »
Good answers
...

I find the statement interesting that wealthy Chinese would rather invest here than in their own booming nation.

Thanks

The investing has to do with governance and trust.  Investors are primarily concerned with whether management of a firm will act in their own best interest of that of nvestors or both.  In many countries like china there are strong pressures to consider factors other than investor returns, whilemthe us both focuses on investor friendly policies and regulatory enforcement to prevent management theft, investor fraud, govt corruption, etc.

A firm I once worked for studied the value of good corporate governance and found the risk premiums required for poorly governed markets to be much higher.  So huge profits can attract investments, but higher expected returns are also required to offset risk.

This is one reason for high PE values of US stocks.  They are perceived to be very safe investments, relatively speaking.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Where does the money come from? Another naive question.
« Reply #10 on: August 28, 2018, 04:36:28 PM »
Overtime the increase comes from increases in productivity.  Nowhere else.  Everything else (like government) is a drain on productivity.

Very basic answer and there is much more involved, but this is the main gear in the economy.
I disagree with this statement and think it is rather naive.  If you want to see government free business in action, there are many parts of the world you can study.  The bottom line is that business conditions without taxes and governement absolutely suck.  In those situations, individual efforts to make money are extremely unproductive. A government free world would not be more productive, as you describe, but more like a mad max nightmare run by gangs and tyrants.

Most people who feel this way have been fed anti government propaganda (frankly I suspect a lot of this was started by Russia beginning in the 50s, but my consiracy theories that modern american 'conservatism' are Russian ideas subtly fed to naive people via a racist weak spot...to undermine America...is not a mainstream thought to explore today).

That asside, all good economic research clearly shows that good Government is not just important, but absolutely essential to capitalism.  Government creates value by providing a stable, safe environment in which to conduct business, which is essential.  Without the rule of law, businesses can not reap profits because their assets are constantly at risk.  This is in addition to the value they provide by building essential infrastructure like roads, telecommunications, legal systems, free education for workers, etc.  If anything, busineses leach free value from government legal and safety services.  Without fire protection, farming losses in California would wipe out nearly all profits, not even counting the free water delivery, health care for migrant workers and other freebees they get.

Be thankful we have a very efficient, rule of law based system to work within.
« Last Edit: August 28, 2018, 04:39:54 PM by PizzaSteve »

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Where does the money come from? Another naive question.
« Reply #11 on: August 28, 2018, 04:53:19 PM »
The price of stocks represent the value of the equity share you hold in the company, and is therefore a percentage of the company's perceived value.
There are a lot of factors involving a company's valuation: its real assets, growth, current and perceived future income.
As these factors change, the price will be affected.

Yeah, I think this is a better way to simply sum it up.  I guess I would qualify it as above, though.  Markets are definitely not entirely rational.  Plus valuation can be affected by whispers of legislation, tariffs, etc.

Cache_Stash

  • Bristles
  • ***
  • Posts: 297
Re: Where does the money come from? Another naive question.
« Reply #12 on: August 29, 2018, 06:00:58 AM »
Overtime the increase comes from increases in productivity.  Nowhere else.  Everything else (like government) is a drain on productivity.

Very basic answer and there is much more involved, but this is the main gear in the economy.
I disagree with this statement and think it is rather naive.  If you want to see government free business in action, there are many parts of the world you can study.  The bottom line is that business conditions without taxes and governement absolutely suck.  In those situations, individual efforts to make money are extremely unproductive. A government free world would not be more productive, as you describe, but more like a mad max nightmare run by gangs and tyrants.

Most people who feel this way have been fed anti government propaganda (frankly I suspect a lot of this was started by Russia beginning in the 50s, but my consiracy theories that modern american 'conservatism' are Russian ideas subtly fed to naive people via a racist weak spot...to undermine America...is not a mainstream thought to explore today).

That asside, all good economic research clearly shows that good Government is not just important, but absolutely essential to capitalism.  Government creates value by providing a stable, safe environment in which to conduct business, which is essential.  Without the rule of law, businesses can not reap profits because their assets are constantly at risk.  This is in addition to the value they provide by building essential infrastructure like roads, telecommunications, legal systems, free education for workers, etc.  If anything, busineses leach free value from government legal and safety services.  Without fire protection, farming losses in California would wipe out nearly all profits, not even counting the free water delivery, health care for migrant workers and other freebees they get.

Be thankful we have a very efficient, rule of law based system to work within.

Did you not read the bolded part?  I'm at 50,000 feet and you're operating at 1,000 feet.  Productivity drives economic growth.  Productivity is a function of many things including regulation (both positive and negative).

The government doesn't directly produce anything.  Taxes are non productive at the point in which the government stops adding value and becomes a tax on productivity.  I never said the government served no purpose.  There are two things the government does really well - Military and Infrastructure (when they don't misallocate tax dollars).

pecunia

  • Pencil Stache
  • ****
  • Posts: 984
Re: Where does the money come from? Another naive question.
« Reply #13 on: August 29, 2018, 07:33:49 AM »
This has prompted some thought on my part.

My perceptions of Wall Street and investors come from movies like "Wall Street" and "The Wolf of Wall Street."  Wall Street traders are portrayed as a bunch of thieves.  People like Bernie Madoff make the news but, of course, the honest people who handle the lions's share of the business do not make the news.

I have worked with people from Bangladesh and Venezuela.  Like Jerod Diamond in his book, "Guns, Germs and Steel," I have pondered why the people of the North American continent are so blessed and those of other lands are not.  I have asked these people as to why their countries haven't been as successful as the United States.  People have lived in these other countries for as long or longer than the United States has existed.  These countries have had natural resources and access to markets.  Unlike the book, their real life experiences have told me that the people in charge are corrupt and this is the reason.  They do not have the interests of the people at large to be one of their paramount values.  Their actions will be to benefit themselves and their immediate circle.  They state this as the main reason why these countries haven't achieved the success which they could otherwise have done.

This leads back to Wall Street and the Chinese investors.  It was stated that the Chinese place greater trust in the US market.  It was stated that the market here has the investors as a greater value than others.  It boils down to honesty.  Their money is being invested in a moral system.  Not every one is moral.  Money is a great temptation to many.  Checks and balances must be put in place to enforce that the system is largely run in a moral fashion.  One of these checks is government regulation.  The accepted rules of morality must be enforced by government regulation or it will degrade due to human nature being what it is.

"Overtime the increase comes from increases in productivity.  Nowhere else.  Everything else (like government) is a drain on productivity."

I can see that this is a false statement.  The Chinese gains in productivity have been greater than the US, yet it was said that their rich investors put their money in North America.  The rule of law based on a tradition of morality has created added value where the regulated Wall Street market is preferred.

I had come to the same conclusion as others some time ago that the public has been fed a bunch of hooey that all government is bad.  If something is repeated enough times, it will be believed, evidence to the contrary.

Perhaps good government regulation and rule making for the market attracts capital and raises the values of my equities.  More money is then available to be spent on productive resources.

Sorry that I digressed.  I see that where the money comes from and why gets quite complex.  Thanks again.


Cache_Stash

  • Bristles
  • ***
  • Posts: 297
Re: Where does the money come from? Another naive question.
« Reply #14 on: August 29, 2018, 07:45:42 AM »
This has prompted some thought on my part.

My perceptions of Wall Street and investors come from movies like "Wall Street" and "The Wolf of Wall Street."  Wall Street traders are portrayed as a bunch of thieves.  People like Bernie Madoff make the news but, of course, the honest people who handle the lions's share of the business do not make the news.

I have worked with people from Bangladesh and Venezuela.  Like Jerod Diamond in his book, "Guns, Germs and Steel," I have pondered why the people of the North American continent are so blessed and those of other lands are not.  I have asked these people as to why their countries haven't been as successful as the United States.  People have lived in these other countries for as long or longer than the United States has existed.  These countries have had natural resources and access to markets.  Unlike the book, their real life experiences have told me that the people in charge are corrupt and this is the reason.  They do not have the interests of the people at large to be one of their paramount values.  Their actions will be to benefit themselves and their immediate circle.  They state this as the main reason why these countries haven't achieved the success which they could otherwise have done.

This leads back to Wall Street and the Chinese investors.  It was stated that the Chinese place greater trust in the US market.  It was stated that the market here has the investors as a greater value than others.  It boils down to honesty.  Their money is being invested in a moral system.  Not every one is moral.  Money is a great temptation to many.  Checks and balances must be put in place to enforce that the system is largely run in a moral fashion.  One of these checks is government regulation.  The accepted rules of morality must be enforced by government regulation or it will degrade due to human nature being what it is.

"Overtime the increase comes from increases in productivity.  Nowhere else.  Everything else (like government) is a drain on productivity."

I can see that this is a false statement.  The Chinese gains in productivity have been greater than the US, yet it was said that their rich investors put their money in North America.  The rule of law based on a tradition of morality has created added value where the regulated Wall Street market is preferred.

I had come to the same conclusion as others some time ago that the public has been fed a bunch of hooey that all government is bad.  If something is repeated enough times, it will be believed, evidence to the contrary.

Perhaps good government regulation and rule making for the market attracts capital and raises the values of my equities.  More money is then available to be spent on productive resources.

Sorry that I digressed.  I see that where the money comes from and why gets quite complex.  Thanks again.

You just supported my point.  The chinese productivity has been better in the last 20 years.  So has their growth in economic output . 

Yes, the US system works better than China's because the government doesn't intervene as much as in China.  China artificially fucks with their system making the playing field completely unlevel.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6724
Re: Where does the money come from? Another naive question.
« Reply #15 on: August 29, 2018, 07:49:45 AM »
I can see that this is a false statement.  The Chinese gains in productivity have been greater than the US, yet it was said that their rich investors put their money in North America.  The rule of law based on a tradition of morality has created added value where the regulated Wall Street market is preferred.

You can increase productivity a number of ways. Some are sustainable and some are not. If you make a fortune in a system that's not sustainable in its current form it's logical to move it to a system that is sustainable even if the likelihood of seeing similar gains is low. When you are not rich you want to hit the accelerator hard to become rich. Once you are rich you want avoid losing that wealth and safety is more important than rapid growth potential.

pecunia

  • Pencil Stache
  • ****
  • Posts: 984
Re: Where does the money come from? Another naive question.
« Reply #16 on: August 29, 2018, 12:01:57 PM »

Cash-Stash:

"You just supported my point.  The chinese productivity has been better in the last 20 years.  So has their growth in economic output .

Yes, the US system works better than China's because the government doesn't intervene as much as in China.  China artificially fucks with their system making the playing field completely unlevel."

I guess I did.  What's more it makes sense.  You can have too much government regulation or intervention or too little.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2388
Re: Where does the money come from? Another naive question.
« Reply #17 on: August 29, 2018, 12:04:11 PM »
On the china topic: Chinese businesses have been very successful in selling products to American consumers, who pay dollars for those products. So you're now a Chinese businessman holding a Dollar. The most natural thing to do is invest that dollar into an American financial product--government bonds are possible--or into American real estate.

This is why the trade deficit is balanced by foreign investment. So for all of the Chinese goods we are buying, the Chinese are buying financial instruments of many different types within the US.