Investors, Speculators and the Stock Market

Due to its length, this article is being published in two parts; Part_1 is available on this site.

If you find it hard to compare the gambling in Las Vegas with the gambling on the New York Stock Exchange, consider each’s activities. In Las Vegas, you enter a gambling casino, exchange dollars for tokens or chips, and wager that certain events will occur according to your predictions. When you put money on a number at Roulette, you predict (or at least hope) that the marble will stop on your number. When you place bets in a card game, you indicate that your cards count higher than others’ cards in your game.

When you put coins or tokens in a Slot machine, you predict that the machine’s parts will randomly align themselves, so more money will be returned to you than you will put into the machine. These activities are called gambling because you are spending and receiving items of value and money. You may only do so legally if you cannot predict your wagers’ outcome accurately. There is a loser; if the house is the winner, the customer is the loser, and vice versa.

Investors, Speculators and the Stock Market 1

If you choose to place wagers on the New York Stock Exchange, you must also place money at risk and presumably be as ignorant or deluded as other players. First, you hire a broker and put money into an account, from which your broker can deduct funds when you wish to buy stocks and into which your brokerage can put your winnings, should you be so lucky. You may contact your broker and tell them which stores you would like to buy and how much to pay. You now own a piece of some company, and your voice counts in managing your corporation according to the percentage of ownership in your name.

You bet your workers and management team will out-produce the competition, make greater profits, and return a larger dividend to you. If your corporation does do better, you not only win with bonuses, but your shares of stock are likely worth more than you paid. Other potential players will see your corporation’s stronger position, and some will bid more money to buy into your game. If you decide to sell your stock, allowing someone else to take your place and risk, you will receive more money than you paid. This profit is called a capital gain.

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If you guessed wrong and your corporation operated inefficiently and lost money, you would not get a dividend, and your stock might drop drastically in value because more owners may want to sell than would-be owners are waiting to buy. Sellers are forced to accept less and less for their stocks, potentially resulting in great losses for some. For everyone who wins, someone else has lost. The big difference betweebetween these two gambling industries is the time between wagers and profit or loss determination.

Brokerages that facilitate stock, bond, and commodity trading operations in a similar manner and purpose to companies that operate gambling casinos. Brokerages do not care if the markets go up or down as long as trades are made. The brokerages charge a fee for each transaction; the more transactions, the more income for brokerages. In gambling casinos, the odds of winning slightly favor the casino owners when one bets against the casino, and the casinos charge players a fee for their facilities when players gamble with each other. The casino owners’ interest also lies in the volume of gambling; the greater the activity, the higher the income for the casinos.

Brokerage firms reap their wages and bonuses through fees from the number of stock, bond, or commodity transactions. Suppose the markets are sluggish, with relatively little trading. In that case, brokerages can buy and sell stocks and bonds with other brokers, kiting stock, bond, and commodity values, thereby creating a mirage of investment activity. This practice is ancient and is called “Churning the market.” This is principally done to provide them with cash flow and protect their stock, bond, and commodity portfolios since their net worth (and the value of their store) are tied to cash on hand and their investments’ market value. This churning hurts ongoing investment activity because it prevents the markets from moving lower and allows investors to purchase stocks, bonds, and commodities at a true market value.

The United States has three principal markets to buy and sell the stock. The New York exchanges are the primary market, and the counter exchanges are the secondary market (NASDAQ). There is another exchange market for stocks and bonds referred to as the “Third Market.” The third market partially joins these two markets to facilitate the selling of large stock blocks. If offered through an exchange to individual investors, they would crash that stock’s value, along with its paper equity, and could create large declines in the overall market, if not panic and chaos.

The third market comprises brokerages that will buy large offerings individually or in concert with other buyers at a set price and then resell them in small lots in the usual manner. Though the fixed price for these large sales is determined by prices set at auction in the exchanges, this stock is not auctioned. It is being sold in a manner contrary to the exchanges’ rules, that all stock sales be offered in public via an auction to let buyers and sellers determine market price and value.

The seller of a large block of stock is guaranteed, through the third market, to receive the highest possible price for such supplies or bonds at the expense of unwary buyers in the regular auction markets. One person’s loss is another person’s gain in these markets. In the public exchange markets, if a large stock block is offered at a price no buyer is willing to pay, it will remain unsold, or only a portion will sell. If it must be sold, the price must drop until buyers agree that it has fallen to its proper value, according to supply and demand in a free market. The third market is just a creation of a controlled market to allow brokerage firms to protect the value of their holdings and to prevent investors from profiting when other market-players must sell.