Economists

I'm a student of Economics but the syllabus never covered Stock Exchange or sale of shares in detail in high school nor college. It's a topic that very interests me not only because I plan to speculate as a secondary source of income in the future but also since its a very intriguing way of raising finance.

I actually feel very inferior despite my results as I do not possess enough knowledge regarding shares. Heck, the only clear picture I have about Wall Street is Wall Street: Money never sleeps movie

I've been doing some reading and I've got some doubts I hope some of you can help me with:

1. Doesn't the firm lose in the long run if they are selling shares? Not only they risk losing ownership, but they are forever obliged to pay dividends. Perhaps its a smaller cost compared to the benefits of expansion made possible due to the high capital raised?

2. Does the sale of secondary shares, (is it sale of shares between a current shareholder and a potential one?) benefit the company directly financially?

I'd really appreciate if you could provide me some source material to read on. Some articles I've read contradict each other so I'd like a clear picture before I start investing

Well, answering your second question, secondary shares don't do anything for the company; just changes the ownership of the company and who the dividends get paid to.

For the first one, it depends, I guess. For extra funds for expansion, you're either going to have to sell shares, or take a loan. If your company goes bankrupt, you wouldn't owe any financial institutions any money, I don't think?

Source material, I don't have any, just my trusty little preliminary economics book that I gave away after my exam a couple of weeks ago

My economics teacher always tells me that shares are basically like gambling. You can make huge wins, but also huge losses, and the risk isn't worth it.

I work as a financial analyst and making money in the stock market is my primary source of income.

By your admission itself, you have a long way to go to understand the stock market.

Go to www.investopedia.com

Some of the legendary investors are Warren Buffet, Phil Fisher, Seth Klarman, Joel Greenblatt, Benjamin Graham, Peter Lynch, John Templeton and many others.

Some of the great traders are George Soros, Richard Dennis (Turtle traders), Jesse Livermore, William O'Neil, Donchian and several others.

There are many resources on the internet on these names or written by these names. That should prove sufficient to gain all the required knowledge on the stock market.

There is no one size fits all approach in the stock market. There are many ways you can make money and it is upto you to find an approach that is suitable for you.

About your 2 questions,

1) As more shares of a company are issued, the ownership % of all the shareholders get diluted. Hence, yes, it is a losing proposition in the long run. One of the primary source of information of a company's ability to make money is the number of times they raise money from the market by issuing more shares. The more they go to the market, the lesser is their earning capacity relative to their capital requirements.

Paying dividends does not have much to do with it as a company is not obligated to pay dividends to shareholders unlike interest payments to bondholders.

2) The sale of secondary shares does nothing for a company's earnings. But it does a lot for the shareholder selling it if he sells it at a profit or it does very little if he sells it at a loss which is of course dependent on the purchase price.


As you are an economics student, you will find it easier than me to grasp many of the concepts compared to when i started out.

beatrixasdfghjk. wrote:Well, answering your second question, secondary shares don't do anything for the company; just changes the ownership of the company and who the dividends get paid to.

For the first one, it depends, I guess. For extra funds for expansion, you're either going to have to sell shares, or take a loan. If your company goes bankrupt, you wouldn't owe any financial institutions any money, I don't think?

Source material, I don't have any, just my trusty little preliminary economics book that I gave away after my exam a couple of weeks ago

My economics teacher always tells me that shares are basically like gambling. You can make huge wins, but also huge losses, and the risk isn't worth it.

Sorry to say this, but your economics teacher is just wrong!

1. Doesn't the firm lose in the long run if they are selling shares? Not only they risk losing ownership, but they are forever obliged to pay dividends. Perhaps its a smaller cost compared to the benefits of expansion made possible due to the high capital raised?

-Highly depends on the growth rate of the company. There are several ways to go about it, what you can do is to calculate the cost of equity (usually people calculate the WACC, but suppose you fund all your growth via equity, hence shares), compare it to the return on equity (or return to capital for WACC). If your return > cost, then it is worth it. In other words, by issuing $1 shares u earn more than $1 returns, good for existing shareholders as well as the growth of the company.

However, sometimes using debt funding is much better, since it will give u a much better return. Capital stucture anaylsis and budgeting is needed to do such stuff.

2. Does the sale of secondary shares, (is it sale of shares between a current shareholder and a potential one?) benefit the company directly financially?

Once the shares are issued in the primary market (between the company and the 1st shareholders), that is where the finances are raised. Of course, the secondary market is extremely important to the company as
1) The secondary market provides liquidity, if there is no secondary market you can bet very few people will want to buy the shares from the company issue in the 1st place due to liquidity issues
2) The secondary market is where you gauge the confidence the market has on the company. Ratios like market value to book value ratios will tell u that. Usually people in the secondary market are more than willing to pay more than $1 for $1 worth of actual value of the shares, thats because people are confident in the company. Also, the more confident people are, the higher your share values will increase, hence better financing the next time you decide to issue your shares.

Hope these helped

kiranr wrote:

beatrixasdfghjk. wrote:Well, answering your second question, secondary shares don't do anything for the company; just changes the ownership of the company and who the dividends get paid to.

For the first one, it depends, I guess. For extra funds for expansion, you're either going to have to sell shares, or take a loan. If your company goes bankrupt, you wouldn't owe any financial institutions any money, I don't think?

Source material, I don't have any, just my trusty little preliminary economics book that I gave away after my exam a couple of weeks ago

My economics teacher always tells me that shares are basically like gambling. You can make huge wins, but also huge losses, and the risk isn't worth it.

Sorry to say this, but your economics teacher is just wrong!

Tomorrow, is the share market going up or down?
Thank you.

beatrixasdfghjk. wrote:

kiranr wrote:

beatrixasdfghjk. wrote:Well, answering your second question, secondary shares don't do anything for the company; just changes the ownership of the company and who the dividends get paid to.

For the first one, it depends, I guess. For extra funds for expansion, you're either going to have to sell shares, or take a loan. If your company goes bankrupt, you wouldn't owe any financial institutions any money, I don't think?

Source material, I don't have any, just my trusty little preliminary economics book that I gave away after my exam a couple of weeks ago

My economics teacher always tells me that shares are basically like gambling. You can make huge wins, but also huge losses, and the risk isn't worth it.

Sorry to say this, but your economics teacher is just wrong!

Tomorrow, is the share market going up or down?
Thank you.

If you look at history, then you will be able to see that money in the stock market has grown at higher rate than money in the bank. This going to be true going ahead too.

Shares are only gambling if you do not know what you are doing. If you know what you are doing, then you can mint money from the stock market. There are several thousand examples!

GFC

beatrixasdfghjk. wrote:

kiranr wrote:

beatrixasdfghjk. wrote:Well, answering your second question, secondary shares don't do anything for the company; just changes the ownership of the company and who the dividends get paid to.

For the first one, it depends, I guess. For extra funds for expansion, you're either going to have to sell shares, or take a loan. If your company goes bankrupt, you wouldn't owe any financial institutions any money, I don't think?

Source material, I don't have any, just my trusty little preliminary economics book that I gave away after my exam a couple of weeks ago

My economics teacher always tells me that shares are basically like gambling. You can make huge wins, but also huge losses, and the risk isn't worth it.

Sorry to say this, but your economics teacher is just wrong!

Tomorrow, is the share market going up or down?
Thank you.

I think he meant that you it is a more educated form of gambling. Technical/fundumental analysis etc will improve your chances of being correct than just going into a blackjack game (although I always felt that in Holdem, it is based a lot on skills and mind games).

In the long run (10 years or more), if a company doesn't go backrupt it has more chance of being higher in price than today, due partly to inflation and partly to the bubbles the nations are building. If you ask me about tmr (tonight's NYSE), i think the share market is going up, partly because it went down too much yesterday, based on Europe's and Asia stocks market it has a good sign, I have not checked the US futures market yet so I dont know about it. Yesterday NFLX dropped more than 35% and the day before 30%, so I think it's price should shoot up today or latest by tmr.

But anyway the point is, very seldom people buy stocks to hold for 1 day

Actually do we have a stocks market thread here? Mods? It would be interesting

beatrixasdfghjk. wrote:GFC

What is GFC?

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

ToEy wrote:

I think he meant that you it is a more educated form of gambling. Technical/fundumental analysis etc will improve your chances of being correct than just going into a blackjack game (although I always felt that in Holdem, it is based a lot on skills and mind games).

In the long run (10 years or more), if a company doesn't go backrupt it has more chance of being higher in price than today, due partly to inflation and partly to the bubbles the nations are building. If you ask me about tmr (tonight's NYSE), i think the share market is going up, partly because it went down too much yesterday, based on Europe's and Asia stocks market it has a good sign, I have not checked the US futures market yet so I dont know about it. Yesterday NFLX dropped more than 35% and the day before 30%, so I think it's price should shoot up today or latest by tmr.

But anyway the point is, very seldom people buy stocks to hold for 1 day

Actually do we have a stocks market thread here? Mods? It would be interesting

Actually, these last few months, the market has been a nightmare. I can understand why Beatrix may say it is gambling in that backdrop. But, like you said, over the long run, you can make more money than parking it in a bank.

And that, I agree with wholeheartedly, but if you're going to put too much money into the share market, you stand the risk of huuuuuuuuuge losses.
AND IT'S LOWER CASE b IN beatrix.

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

kiranr wrote:

ToEy wrote:

I think he meant that you it is a more educated form of gambling. Technical/fundumental analysis etc will improve your chances of being correct than just going into a blackjack game (although I always felt that in Holdem, it is based a lot on skills and mind games).

In the long run (10 years or more), if a company doesn't go backrupt it has more chance of being higher in price than today, due partly to inflation and partly to the bubbles the nations are building. If you ask me about tmr (tonight's NYSE), i think the share market is going up, partly because it went down too much yesterday, based on Europe's and Asia stocks market it has a good sign, I have not checked the US futures market yet so I dont know about it. Yesterday NFLX dropped more than 35% and the day before 30%, so I think it's price should shoot up today or latest by tmr.

But anyway the point is, very seldom people buy stocks to hold for 1 day

Actually do we have a stocks market thread here? Mods? It would be interesting

Actually, these last few months, the market has been a nightmare. I can understand why Beatrix may say it is gambling in that backdrop. But, like you said, over the long run, you can make more money than parking it in a bank.

Its not really a nightmare (unless you are a medium term investor). There are a lot of value stocks right now...just got to identify the right ones. APPL for instance was a value stock at $360++, banks such as C, BAC etc all seem to be value stocks, that is they might drop in the near future due to bad news in Europe, but in the long run they are better than currently priced. Also, put options and short-selling can earn you some quick bucks. However you are right, the market is so volatile nowadays that it is hard to ignore 1 week's losses without having a heartattack lol

kiranr wrote:

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

The banking crisis might be small compared to imo the impending sovereign debt crisis....some even suggest that we are heading into a depression like the one that happened nearly a century ago haha

kiranr wrote:

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

Where's here?

The ASX 200 over the last five years, for example:

I don't think there's any way the IMF would let Greece default on their loans: no one's ever heard of a country going broke.

beatrixasdfghjk. wrote:And that, I agree with wholeheartedly, but if you're going to put too much money into the share market, you stand the risk of huuuuuuuuuge losses.
AND IT'S LOWER CASE b IN beatrix.

It depends. You need to have some level of knowledge if you are going to put money in shares. If you know what you are doing, then the risk of huge losses is super low.

beatrixasdfghjk. wrote:

kiranr wrote:

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

Where's here?

The ASX 200 over the last five years, for example:

The ASX (australia as a whole) was not exactly as affected as Europe or US in due to the crisis. If anything, China's data will affect it much much more because Australia is a commodity economy

kiranr wrote:

beatrixasdfghjk. wrote:And that, I agree with wholeheartedly, but if you're going to put too much money into the share market, you stand the risk of huuuuuuuuuge losses.
AND IT'S LOWER CASE b IN beatrix.

It depends. You need to have some level of knowledge if you are going to put money in shares. If you know what you are doing, then the risk of huge losses is super low.

Well you can hedge it with options and at most lose the premium haha. The premium sometimes is huge tho....

You know those times when an professional investor gets outdone by a dart board and a chimpanzee?

Yeah.

ToEy wrote:

beatrixasdfghjk. wrote:

kiranr wrote:

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

Where's here?

The ASX 200 over the last five years, for example:

The ASX (australia as a whole) was not exactly as affected as Europe or US in due to the crisis. If anything, China's data will affect it much much more because Australia is a commodity economy

Oh yeah, sorry, forgot that part
But you can still see it's affected.
I'll find a Wall Street one then.

beatrixasdfghjk. wrote:I don't think there's any way the IMF would let Greece default on their loans: no one's ever heard of a country going broke.

I think Russia defaulted way back (LTCM case), but im not 100% sure. Greece will semi-default if you ask me, im more concerned about Spain and especially Italy

ToEy wrote:

kiranr wrote:

ToEy wrote:

kiranr wrote:

beatrixasdfghjk. wrote:GFC

What is GFC?

Global financial crisis lol

Oh. It is called the banking crisis here. But this crisis presents such an amazing time to put your money into the stock market.

The banking crisis might be small compared to imo the impending sovereign debt crisis....some even suggest that we are heading into a depression like the one that happened nearly a century ago haha

Sovereign crisis risk is there, no doubt. If it happens, it is going to be a big blow to the economy. But some how, even with all the wrangling by the politicians, i dont think they will let it happen.

If Greece defaults, they have in principle agreed to capitalize the banks to compensate the write downs. So most likely, there will not be a contagion, which is the biggest risk there is at present.