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Explained: Fictional stock market wealth
For example, let`s say five people each own one share of a company that has only five shares. Let`s say each share is worth $10. How much money is there total? Well, it`s five times 10, so that makes $50.
Now, let`s say that one of these five people decides to sell his share to his friend, but he`s convinced his friend to buy it for $20 (a profit of $10 to the seller). He sells one share to his friend for $20. What`s the share price now, for the whole company? The share price is $20 because the share price is based on the last sold price. Now there are five people and each of them has one share that`s worth $20. Suddenly, there`s $100 total instead of $50 total. All five people think they`ve just doubled their money!
That`s what happens in the stock market. See, all five people think they`re getting rich. But what really happened is that one idiot bought the stock at double the price. There was no new customer, no new business revenue and no new profit. There was just one guy who overpaid for the stock. That`s how fictional wealth is created in stock market exchanges. It`s just an illusion. Where did this extra $50 come from? It came out of nowhere. It`s just numbers on paper.
The reverse also happens. Let`s say there are five people who now own stocks that they think are worth $20, because that`s what one person paid. Then, one person decides to sell the stock but can only sell it for $10. Suddenly, the stock price for the entire company drops to $10. Now these five people who thought they had $20 each just lost $10. They lost half their equity in the company. Now they only have $10 each, and the total worth is now $50. Where did the other $50 go? Well, it didn`t go anywhere because it didn`t exist. It was just on paper. This is what happened during the dot-com boom, except that larger sums of money were involved.
What does all this have to do with home loans? Banks loan money to people based on their individual assets, and those assets include fictional wealth that only exists as numbers on paper (or bytes in a computer database, actually). And these numbers can be easily distorted by irrational buyers who overpay. As a result, many banks are making home loans using little more than thin air as the assets backing the loans.
This is how a real estate bubble happens at the same time as a stock market bubble. This is San Francisco in 1999. This is Silicon Valley in 2000. It`s exactly what happened. At that time, I was warning about the looming stock market crash, and it was poorly received. A few people listened and they sold their stocks and were safe, but most people didn`t. They said, "You`re crazy. This thing is going up forever. We are all rich. We are all rich!"
But I knew better. When you sell a share and you have cash in your hand, then you can count it as money. Until then, it`s just whatever somebody else paid for it. My point in explaining all of this is that I`ve told this same story to financial advisors. They would look at me and say, "What? I don`t get that. What do you mean? What do you mean that money is created out of thin air?" They don`t get it. When the dot-com crash happened, billions of dollars were lost overnight through that exact same method I just described. Billions of dollars did not fly away. Those dollars did not get transferred into some rich person`s pocket, which is what most people believe. They think rich people ran away with the money. That`s incorrect. The money never existed in the first place. The money disappeared overnight because suddenly the stock price was dropping rapidly.
Sunday, January 01, 2006 by: Mike Adams, NaturalNews Editor...
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Posted by :
alok25Tracked by: 0 Boarder
i have about 10 lac in saving acct which i don\\\\\\\\\\\\\`t need till next three years.looking at current market pls advise me some good fund to invest,and shall i start trecnching or start SIP....
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Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
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MMB Messenger
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Theses are your options, Analysis of past downturns of the market and revival patterns ,Research reports on markets,Performance of global markets and past trends ,Reasons behind the present downfall of global indices ,How to stay invested & reap long term benefits ,Other. Tell us and we can help you to stay informed
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Crude plunged more than 9% to settle below USD 50 per barrel on the New York Mercantile Exchange after OPEC, or the Organization of Petroleum Exporting Countries, deferred a decision on new supply cuts at it`s meeting in Cairo over the weekend. ...
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Crude has a good support at USD 40 per barrel & I think that level will be tested....
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Crude dips 9% as OPEC defers supply cut decision
Posted by : MMB Messenger
Crude plunged more than 9% to settle below USD 50 per barrel on the New York Mercantile Exchange after OPEC, or the Organization of Petroleum Exporting Countries, deferred a decision on new supply cuts at it`s meeting in Cairo over the weekend.
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Yesterday US manufacturing index dropped to its 26 year\\\\`s low. Also, Job cut in manufacturing sector will continue.
Well not only this, but newspapers are also in trouble. Some might be thinking that at least people will read more newspapers in this crisis. But in fact, the US Newspapers ad sales fall a record USD 2bn almost 18%. That is sharp drop. Online ad sales also seen massive drop. Even news media will have to face financial crisis to its record bottom globally....
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US mkts crash on growing economic concerns; Dow dips 680-pt
Posted by : MMB Messenger
Wall Street snapped its 5-day winning streak, wiping out more than half of last week`s rally; Dow Jones ended down almost 8%, Nasdaq down 137 points and S&P 500 slipped to 816.
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Wall Street snapped its 5-day winning streak, wiping out more than half of last week`s rally; Dow Jones ended down almost 8%, Nasdaq down 137 points and S&P 500 slipped to 816....
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Posted by : vasudevamonkerTracked by: 0 Boarder
I am a long term investor looking out for an investment with a time horizon of at least 5 years.Also I am always looking forward to invest in fundamentally strong companies and I always stay away from penny stocks.Please let me know whether I should keep investing at every fall or should I wait for further downfall especially when Lok Sabha elections are declared?...
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Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Posted by : MMB Messenger
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Theses are your options, Analysis of past downturns of the market and revival patterns ,Research reports on markets,Performance of global markets and past trends ,Reasons behind the present downfall of global indices ,How to stay invested & reap long term benefits ,Other. Tell us and we can help you to stay informed
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Indian Hotel Company and EIH rose on reports their hotels in Mumbai which came under terrorist attacks last week were fully insured against terrorist strikes.
Indian Hotels Company rose 0.75% and EIH rose 1.28%. Indian Hotels Company operates Taj Group of Hotels and EIH operates Oberoi Group of Hotels.
Shares of Indian Hotels Company which owns the Taj Group of hotels had fallen 17.03% on Friday, 28 November 2008, when the combat operation were proceeding in Taj Hotel Mumbai. EIH which owns the Oberio group of hotels, had opened lower on that day but had bounced back to end 5.22% higher on that day after reports came in afternoon trade the commandos had got control over the Oberoi hotel.
As per reports, the EIH had taken out an insurance policy with New India Assurance and United India Insurance Company - the two-state-owned insurers for the Oberoi-Trident hotel. The extent of damage to both the hotels was not announced by the companies so far.
Indian Hotels Company, which operates the 565-room Taj Mahal Palace and Towers has a risk cover with Tata-AIG General Insurance Company and a few other insurers. Apart from Tata-AIG, a 30% insurance cover was provided by ICICI Lombard and a 5% by Iffco-Tokio General Insurance.
EIH has also taken a loss of profit insurance that protects it against business losses arising from any untoward events.
EIH chairman P R S Oberoi said in a media interview on Saturday, 30 November 2008, the terrorism risk cover (which comes along with fire insurance) and the loss of profit insurance would cover the makeover cost for the bombed-out hotel and the loss of profit during the period that Oberoi Hotel remains closed.
Meanwhile, reports suggest that general insurance companies offer risk covers against terrorism through a common pool with the present corpus estimated over Rs 1,000 crore. The money is later used for settlement of terrorism-related insurance claims.
Other Stories
4 Moser Baer gains on diversification buzz (1-Dec 12:56 Hrs IST)
4 Terror strike boosts Zicom Electronic Security Systems (1-Dec 12:25 Hrs IST)
4 Sterlite Industries shines on block deal (1-Dec 11:55 Hrs IST)
4 Arvind soars on nod for demerger (1-Dec 11:22 Hrs IST)
4 Astra Microwave surges on new order win (1-Dec 11:18 Hrs IST)
4 GVK Power and Infrastructure gallops as power project is ahead of the schedule (1-Dec 10:37 Hrs IST)
4 Maruti Suzuki slumps on poor sales in November 2008 (1-Dec 10:30 Hrs IST)
4 Investors give a thumbs up to Balaji Distilleries-United Spirits merger (1-Dec 10:02 Hrs IST)
4 Ashok Leyland skids on putting expansion plan on hold (1-Dec 09:53 Hrs IST)
4 India Infoline capitalises on buyback nod (1-Dec 09:47 Hrs IST)
Next4
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Asian markets are trading mixed. Shanghai Composite fell 24.294 points or 1.30% to 1,846.862. Nikkei lost 166.44 points or 1.96% to 8,345.83. However, Hang Seng rose 240.90 points or 1.73% to 14,129.14. Seoul Composite rose 6.03 points or 0.56% to 1,082.1...
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Stock Market Survival Tips
Riding Out The Economy Highs And Lows
Grant`s first tip is simple: don`t panic. Don`t go on a stock selling spree in an effort to stave off losses. "If you sell, then you`re turning those paper losses into real losses," says Grant. This means you`ll have less invested in the stock market once it begins to climb again. How long will that take? Experts aren`t quite sure, but history has shown that there is a period of robust growth after times of economic crisis.
That means it`s best to keep investing, even if it presently feels like a losing proposition. While stocks may be falling, that`s actually good news for buyers. "You`re buying shares very cheaply," says Grant. "That`s going to mean it`s much easier to recover when the market bounces back."
In the mean time, have an emergency fund in a liquid account like an FDIC insured CD or money market savings account. Grant suggests beefing up these savings in times of crisis. You never know how low the market will go, so keeping 3-6 months of living expenses at hand can help ease financial stresses. If some financial crisis does arise, at least you`ll know you can handle it without dipping into your retirement account or relying solely on credit cards.
Also, take a look at your retirement fund. If you have more than five years until retirement, now is a great time to convert an IRA to a Roth IRA. During this process, you usually pay income tax on every dollar that`s converted. "In this case, you`ve got fewer dollars rolling over, so it means less of a tax hit," says Grant. She also adds, though, that if you convert to a Roth IRA and see that you`re still losing a substantial amount of money, it`s not too hard to convert the money back over to a regular IRA.
Finally, resolve to tackle your high-interest debt. Speak with your credit issuer about lowering your interest rates. "Most of them are still willing to do this because they`d rather you stick with them than go to another competitor`s promotional rates that are still out there," says Grant. Put as much toward your debt as you can and do your best to pay things down.
Kelli Grant, Senior Consumer Reporter for SmartMoney. com
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In reply to:
Why do we need stock markets?
Posted by : sambala
Shared pain
For individuals who own shares, a price fall represents of real loss of wealth. This may recover over time, but the recovery may be slow and cannot be guaranteed.
For those who are close to retirement and have pensions with a significant proportion of the funds invested in shares, or mutual funds, the effect could be especially significant. The value of their pension pot at current valuations will be significantly lower than earlier in the year.
The best strategy is probably to postpone retirement (where possible) and certainly to postpone cashing in the pension pot and converting it into an annuity. If in any doubt as to the best course, seek independent professional advice. There can be no guarantees that the worst is over, and even if it is, the recovery may be slow and measured in months and years, rather than days or weeks.
Alec Chrystal is head of Faculty of Finance, Cass Business School, City University, London.
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Shared pain
For individuals who own shares, a price fall represents of real loss of wealth. This may recover over time, but the recovery may be slow and cannot be guaranteed.
For those who are close to retirement and have pensions with a significant proportion of the funds invested in shares, or mutual funds, the effect could be especially significant. The value of their pension pot at current valuations will be significantly lower than earlier in the year.
The best strategy is probably to postpone retirement (where possible) and certainly to postpone cashing in the pension pot and converting it into an annuity. If in any doubt as to the best course, seek independent professional advice. There can be no guarantees that the worst is over, and even if it is, the recovery may be slow and measured in months and years, rather than days or weeks.
Alec Chrystal is head of Faculty of Finance, Cass Business School, City University, London.
...
In reply to:
Why do we need stock markets?
Posted by : sambala
Share values have dominated the news for weeks yet for many of us they seem a world away from our day-to-day life. Professor Alec Chrystal explains why stock markets exist.
It is easiest to answer this question with another question which is: why do we need companies?
Companies are legal entities which exist to co-ordinate the production of the goods and services that a modern economy delivers, and in the process provide employment to large numbers of people.
They are where many of us work and from which we buy many of the products we consume. They are not the only form a business organisation can take. Government-owned companies would be called public corporations. Small businesses may be "sole traders" or partnerships, which are not companies.
Whenever a company is formed, its owners are the shareholders. Some companies may have only one shareholder and if that is a single person then it will be a private company. If there is more than one shareholder, they own the company jointly, and the size of each share of ownership depends on the proportion held of the total number of shares in existence. So if a company had 100 shares issued then the owner of 10 shares would own 10% of the company.
Why sell shares?
A key reason for forming a company is that the shareholders of a modern company have "limited liability". This means that a shareholder can lose what they paid for their shares in a company but they are not liable for the debts of the company beyond that. This is not true in, for example, a partnership, where partners are jointly liable for all the debts incurred.
Investing in company shares is thus potentially attractive, as shareholders get a share of the profit of the business but know that the worst that can happen is that they lose the value of the original investment. Many shares are not very volatile at all in normal times, but the recent past has been a very abnormal time
Thus, wherever we have companies we must also have shareholders. Does this also mean we must have markets in shares?
The answer here is no. The Bank of England is a company and its only shareholder is HM Treasury but there is no market in its shares. Virgin is a private company so its shares are not for sale.
It is entirely up to the existing owners of such companies to decide if they want to sell shares to others or not. However, many companies have taken the decision in the past that they do want to sell shares on an open market and the largest of these companies will have their shares traded on an organised stock exchange.
These are known as "quoted companies" and the prices of their shares can be read in the financial press each day. Anyone who wants to can buy these shares, though most are held by big investment institutions such as pension funds and life assurance companies, which hold these on behalf of their members or customers.
The benefit to companies from having their shares publicly traded is that they can issue new shares to raise capital for future investment. The only alternative source of funding would be to increase debt (by borrowing more from banks or issuing bonds).
The benefit to investors from having shares traded is that they are not locked into the investment for an indefinite period. Shares held can be sold at their current market price whenever the markets are open.
So why are share prices so volatile? A partial answer is that many shares are not very volatile at all in normal times, but the recent past has been a very abnormal time.
And share prices are determined by the balance of demand and supply in the market at any point in time. If there are more sellers than buyers, prices will fall and vice versa. Share prices will move most when there are big news events affecting investors` perceptions of the future prospects for the company concerned.
The value of all shares outstanding in a company (the "market cap") is the current market value of the future profit stream that that company is expected to generate. For example, when oil prices rise sharply, investors will calculate that profits of oil companies are likely to rise in future, so prices of shares in companies like Shell and BP will jump up.
There are times when waves of excessive optimism drive share prices up, such as during the dotcom bubble. The recent episode of share price falls has been a product of pessimism about the prospects for survival of many banks, followed by pessimism for the immediate prospects for many other sectors of the economy in a global slowdown.
Share prices convey the message but the existence of traded shares is not the cause of the problem. The problem is the mistaken investment lending decisions of the many financial institutions that forgot that house prices can fall and that most loans are risky.
Tracked by: 0 Boarder
Share values have dominated the news for weeks yet for many of us they seem a world away from our day-to-day life. Professor Alec Chrystal explains why stock markets exist.
It is easiest to answer this question with another question which is: why do we need companies?
Companies are legal entities which exist to co-ordinate the production of the goods and services that a modern economy delivers, and in the process provide employment to large numbers of people.
They are where many of us work and from which we buy many of the products we consume. They are not the only form a business organisation can take. Government-owned companies would be called public corporations. Small businesses may be "sole traders" or partnerships, which are not companies.
Whenever a company is formed, its owners are the shareholders. Some companies may have only one shareholder and if that is a single person then it will be a private company. If there is more than one shareholder, they own the company jointly, and the size of each share of ownership depends on the proportion held of the total number of shares in existence. So if a company had 100 shares issued then the owner of 10 shares would own 10% of the company.
Why sell shares?
A key reason for forming a company is that the shareholders of a modern company have "limited liability". This means that a shareholder can lose what they paid for their shares in a company but they are not liable for the debts of the company beyond that. This is not true in, for example, a partnership, where partners are jointly liable for all the debts incurred.
Investing in company shares is thus potentially attractive, as shareholders get a share of the profit of the business but know that the worst that can happen is that they lose the value of the original investment. Many shares are not very volatile at all in normal times, but the recent past has been a very abnormal time
Thus, wherever we have companies we must also have shareholders. Does this also mean we must have markets in shares?
The answer here is no. The Bank of England is a company and its only shareholder is HM Treasury but there is no market in its shares. Virgin is a private company so its shares are not for sale.
It is entirely up to the existing owners of such companies to decide if they want to sell shares to others or not. However, many companies have taken the decision in the past that they do want to sell shares on an open market and the largest of these companies will have their shares traded on an organised stock exchange.
These are known as "quoted companies" and the prices of their shares can be read in the financial press each day. Anyone who wants to can buy these shares, though most are held by big investment institutions such as pension funds and life assurance companies, which hold these on behalf of their members or customers.
The benefit to companies from having their shares publicly traded is that they can issue new shares to raise capital for future investment. The only alternative source of funding would be to increase debt (by borrowing more from banks or issuing bonds).
The benefit to investors from having shares traded is that they are not locked into the investment for an indefinite period. Shares held can be sold at their current market price whenever the markets are open.
So why are share prices so volatile? A partial answer is that many shares are not very volatile at all in normal times, but the recent past has been a very abnormal time.
And share prices are determined by the balance of demand and supply in the market at any point in time. If there are more sellers than buyers, prices will fall and vice versa. Share prices will move most when there are big news events affecting investors` perceptions of the future prospects for the company concerned.
The value of all shares outstanding in a company (the "market cap") is the current market value of the future profit stream that that company is expected to generate. For example, when oil prices rise sharply, investors will calculate that profits of oil companies are likely to rise in future, so prices of shares in companies like Shell and BP will jump up.
There are times when waves of excessive optimism drive share prices up, such as during the dotcom bubble. The recent episode of share price falls has been a product of pessimism about the prospects for survival of many banks, followed by pessimism for the immediate prospects for many other sectors of the economy in a global slowdown.
Share prices convey the message but the existence of traded shares is not the cause of the problem. The problem is the mistaken investment lending decisions of the many financial institutions that forgot that house prices can fall and that most loans are risky.
...
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Astromoney? Yeah Right. But even you must have some faith in the intelligence of your readers. At least I hope so. After all, there is something called insulting the intelligence....
In reply to:
Time to invest in copper and sugar
Posted by : MMB Messenger
According to Lt Col Ajay CEO www.astromoneyguru.com -Financial astrology says now this is almost bottom levels for investment in copper and Sugar.
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Posted by :
indianstockTracked by: 0 Boarder
Reasons behind the present downfall of global indices...
In reply to:
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Posted by : MMB Messenger
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Theses are your options, Analysis of past downturns of the market and revival patterns ,Research reports on markets,Performance of global markets and past trends ,Reasons behind the present downfall of global indices ,How to stay invested & reap long term benefits ,Other. Tell us and we can help you to stay informed
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Posted by : MMB MessengerTracked by: 0 Boarder
Need a guide to investing in turbulent times? What kind of information or analysis or research material you would prefer to have instant access to?
Theses are your options, Analysis of past downturns of the market and revival patterns ,Research reports on markets,Performance of global markets and past trends ,Reasons behind the present downfall of global indices ,How to stay invested & reap long term benefits ,Other. Tell us and we can help you to stay informed
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