What IS a share of stock in a business ? What is a business ?
We know what a business is, it’s an ongoing commercial enterprise, rings up sales and pays its expenses. What’s it worth ?
You gotta look at its books and understand its operations to know.
A share of stock is part ownership in such a business.
Now think carefully...
How in the world can shares of stock be traded like commodities, like pork bellies or copper or wheat ?
With commodities, the trader has perfect information on the underlying asset - the copper, the wheat, etc.
What are you buying - A BUSHEL OF WHEAT !
Now with shares of stock in publicly-traded companies...
what does the trader know about the real value of the underlying asset - the shares of ownership in the business ?
Does the trader know the real value of the business ?
Hint: he has not got a clue about it.
Why ?
Only the officers of the company can POSSIBLY know what’s really going on in that business.
I would think that mutual funds and pension funds are at a serious disadvantage if they don’t use these techniques. For us little folk, there’s nowhere to turn, with interest rates on savings being so low.
Long-term investors don’t need to worry about this.
When stocks are low, they stay low for a long time, so there’s no need to rush. Throughout most of 2009 and 2010, you could buy top companies at 8-10 times trailing earnings. Did institutional investors rush into scoop up these fantastic bargains? No.
Not unlike the way cops turn a blind eye to some petty criminal activities in exchange for the occasional information they may want from these sources. A convenient arrangement for both parties as it were.
Interesting behind-the-scenes article. Thanks for posting.
The speed of light is now making financial centers like Noo Yawk important again. Getting closer to the broker server gives you a speed advantage.
Do you know why joe and joanna six pack should be investing mostly in bonds instead of stocks ?