From: Brian Atkins (brian@posthuman.com)
Date: Mon Sep 09 2002 - 19:50:57 MDT
Forget about the voting rights, they are generally worthless unless you
own a huge chunk of the company. Stock (do you believe a company has an
intrinsic value?) does have intrinsic value. The problem is, it is
constantly changing and is essentially equal to "what someone will pay for
it right now". It is an alternate form of very liquid currency... so while
you can't live in it like a house, you can generally sell it instantly if
necessary. Or if you are the company itself you can use it to pay for things
(like buying other companies). So to reiterate: it is not much different
than a house (worth something because someone will pay you for it later)
except you can't live in it but you have much better liquidity (assuming
it's a public company).
Stock does not do anything to make it worth paying for; the company does
(which in turn affects the stock price). If the company does something that
makes it theoretically more valuable, then the stock is worth more.
Why do you buy stock? As you say, you buy it because you think it will
appreciate in value. Isn't that one of the main reasons to invest in a
house? Otherwise it would be a simple luxury right?
BTW the value can be redeemed without necessarily having to sell the stock
immediately. Similar to a house, you can use the stock as collateral for a
loan, or you can barter the stock to someone in exchange for something. Or
you can donate it to a charity, etc.
As to your last question, in general the company is worth more when its
profits sustainably increase, but not necessarily. For instance if it
pumped up its earnings by selling off a valuable part of itself, it may not
be worth more. Or like the current automobile companies, if they have to
cut their long term financing rates to zero percent in order to keep making
short term profits they may actually be worth less. The market generally
discounts expected future events (some say 6 months out, but it varies...
in 1999 the market was looking at a mirage very far out) when it attempts
to put a value on a company.
The stock market supplies several things then: a way for anyone to see what
the combined mental output of a significant chunk of humanity thinks a
company will be worth in 6 months, a way for anyone to try their hand at
increasing their wealth by speculating, an alternate currency for companies or
individuals to use as they will, a way for the original investors in a company
to "cash out" the gains in wealth they made by making the original risky
investment, a way for companies to efficiently raise more capital when
necessary by issuing additional shares, etc.
-- Brian Atkins Singularity Institute for Artificial Intelligence http://www.singinst.org/
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