The Current Economy vs. The Stock Market

By: Luke Hawthorne Click author's name for more of his/her articles

But surely that's the same thing isn't it? Nothing could be further from the truth! While it's understandable that most people think that a booming stock market means that a country's economy is in good shape, it simply isn't the case.
People assume (and it's NEVER a good idea to assume ANYTHING; assuming is just 'guessing' by another name) that because the stock market is where many company's stock is traded, then this means that if these companies share prices are on the rise, then they are doing better (making more profit) and therefore the country that these companies are doing business in, must be doing equally well.
On further inspection, you can quickly see that this really is not the case at all. You see, share prices are only rarely based on real value.
A company (including publicly traded firms on the stock market AND privately held LLC's etc.) could all be sold for an agreed upon amount of money. If you take an owner operator (sole-trader) operation, like perhaps a trucker who has his own rig, IF he owns it outright and doesn't owe anybody money for his truck, then his company, if he sold it, would be valued at whatever he could get for his truck, along with any "good will" (customers and contacts) that he might have.
But let's get back to the stock market. Publicly traded companies allow you to buy shares of those companies. Both the S & P 500 (Standard and Poor's top 500 companies traded in the U.S.) and the Dow Jones Industrial Average (the "Dow") both show indexes of how much the companies they list are worth. The problem is, "worth" is a very subjective and emotional thing.
Take the trucker mentioned above; he (or she) would tell you that his truck and contacts are worth a lot more than most people would be willing to pay him. Why? Because anybody buying anything MUST feel that they are getting MORE in return for what they are paying. This is the mindset of ALL trading. BOTH parties must feel that THEY are getting the better end of the deal; otherwise no trade would ever take place.
So, knowing this, if you apply it to the stock market, you will see that people are trading stocks because they always THINK they are getting something that will be worth MORE later on. This is the speculative nature of the stock market. Traders are buying something one day, expecting (i.e. hoping and praying) that they can sell the same stock at some future time for more than they paid for it. The difference would be their profit.
Where does this profit come from? Somebody ELSE who thinks that the amount he/she is paying is STILL a lot less than what it can be sold for at a later date.
The Stock Market is little more than a sophisticated (or should I say COMPLICATED) Casino. It's where people either gamble with large amounts of money, or they make their trades with factual information that they have at their disposal (otherwise known as insider trading, which, though illegal, is practiced all the time).
I say the stock market is complicated, but obfuscated is probably a better word to describe it. It's obfuscated by the ongoing invention of derivatives. Derivatives are little more than a series of new ways to make trading products and shares more difficult, making the stock market less available to those who aren't "in the know". Financial instruments such as options, futures, swaps and forwards make understanding the processes too complex for the average person working a job to deal with.
The stock market is a "zero sum game". Any trader or investor will tell you that; it's almost a cliché. What this means is simply this: NOTHING is ever created in the stock market. Products aren't created, nor is wealth created. If somebody wins, somebody else must lose.
It COULD be said that money is created, but that's NOT A good thing for a country's economy. Creating money from nothing (i.e. without any new invention, discovery, service or product) and pumping it into the economy can only ever HURT a country's economy. It damages the economy by devaluing whatever currency is already in circulation, leading, inevitably, to inflation (or even hyper-inflation).
If you take a group of companies whose stock price has plummeted, pressure is put on the CEO's to make the share prices rise again. They often achieve this by cutting costs. One of the highest costs in any company is staff; so this is an area where cuts are made very quickly. This is good for shareholders in the sh

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About The Author:

Luke Hawthorne has been writing for over 14 years. His interests include making money, flying airplanes, skiing, scuba-diving and paragliding.

www.lukehawthorne.com/

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