While at one time, the possibility of liquidating a corporation or holding stocks for their dividends was what drove share prices - and numbers of shares were rather small - and at that time, the value of companies was reflected in their stocks - now, stocks are liquid instruments of institutionalized gambling. It reflects real-world value about as well as the value of World of Warcraft gold pieces. If everyone got out of the market, it wouldn't merely collapse, it would dissolve, and we would find out who really ran the show at the individual companies - who could set their own salary, for instance.

there are two kinds of stocks (i'm simplifying here) . ..

stocks that pay dividends - these are slow growth (no growth) stocks like utilities (electric, gas, water) where the companies are highly regulated (rates) and have a quasi monopoly. the dividends have to be high because no matter how savvy your electric compay CEO is he can't double sales or the unit price over the next 12 months. these stocks are almost like bonds, except with fewer protections. they're called widow and orphan stocks because smart investors traditionally shunned them

growth stocks - if you have a company THAT can double profits in a year (Apple, Microsoft, google) then the thinking (by investors) is that share prices should double in lockstep, even though dividends are minimal or non existent. this works until you have an "earnings disappointment', like we've been having for the past 18 months or so.

the new wrinkle is that expanding government oversight is going to transform some former "growth" stocks into slow/no growth stocks. what companies you ask? think anything the government has been trying to bail out, own, or has lambasted as "bad guys"

not just citibank - all banks. all banks must now (in geithner's view) be prevented from charging more than competitors, growing too big, or innovating too much.

general motors. and maybe ford. why ford? at some point the regulations and gimmes which the federal government applies to GM will be regarded by the UAW and others as "industry standard". Ford is actually at a disadvantage in some regards - they didn't get all that free money which GM got. If ford can retain its independence, and ability to innovate, it will create better products than GM, and its sales will recover faster. if . . . if . . . if . . .

health care companies, health care insurers will lose ground, if the federal government gets its way and reimbursements are driven radically down. however, if you scoff at the notion that the federal government is an effective cost cutter (google "$700 hammer" or "entitlement overrun") then you might perversely BUY stocks of hospitals, on the expectation that they will prevail on their senators or congressmen to keep the money flowing;

no need to thank me for this clarification. glad to help out.

Consider your use of the term investors as in your statement "... they're called widow and orphan stocks because smart investors traditionally shunned them." If you do some research you will find that those who buy and sell equities specifically to profit from the price of the equities are called "speculators".

In fairness, the market for stocks would not disappear entirely. There are real companies with real value listed on the market.

You are right that the stock market is like gambling in that stock trades are zero sum (other than special circumstances that inject capital into the underlying asset like direct public offerings). They differ from what is generally considered gambling, however, in that the expected return on capital is positive.

Since the stock market is zero sum, in periods where the amount of money put into the market increases (as it has over the past few of decades) returns get spread more thinly and share prices inflate. At some point, the returns become small enough that the flow of new money into the market slows and the profitability of stock ownership drops (while the risk does not).Because prices are inflated by high demand, does not mean that those prices are not rreal (though it may mean that you would refuse to pay them).

That being said, a lot of people are betting on continued demand and are buying stocks that show little prospect of ever accruing money other than through sale to another investor (Google, which refuses to even consider issuing dividends and is unlikely to be bought by another company, is a prime example).

"They differ from what is generally considered gambling, however, in that the expected return on capital is positive."

I wonder if that isn't partly illusion. The expected return is based on prior performance and that usually implies a reliance on long term indices, such as the DJIA, NASDAQ-100, and S&P 500. However, these indices are all biased; first by the fact that they are not inflation adjusted and secondly, and perhaps more importantly, they are cherry-picked: bad performers are, by design, removed from the averages and replaced with rising stocks. Thus, growth in these indices is forced and unrealistic. Many of the stocks at one time included in the DJIA are gone - in some cases by bankruptcy - so that their stock value is really zero. I think a lot of the positive expected return is wishful thinking.

This is nonsense. Stocks represent an ownership claim on real assets. That's what companies are: a sum of valuable assets.

If "everyone pulled out of the market" then you'd have a bunch of power plants, factories, office buildings, technological patents, and oil reserves that could be scooped up for nothing.

Insofar as stocks don't pay dividends, it is because they are reinvesting their earnings (largely because the tax treatment of dividends is so onerous.) It's nice that they do because the American consumer hasn't been doing so for years.

I would say "should" represent an ownership claim on real assets. I suggest you try to exercise your ownership claim on most stocks these days and see how real that ownership turns out to be. The market evolved from what you described into a big bubble that really is yet to burst.

I have to endorse your recommendation. There was considerable coverage on CNBC about the decision that Berkshire Hathaway (Warren Buffet, proprietor) was going to buy Burlington Northern Santa Fe (BNI). Buffet was briefly interviewed and told what I consider a disturbing tale:

Buffet said that he called the CEO of BNI and suggested that Berkshire Hathaway buy out the part of BNI it didn't own (about 3/4). He said that he asked the CEO to take it up with "his" Board of Directors. He concluded his tale with the comment "It all took about 15 minutes". I owned BNI until I sold it a few minutes after that interview appeared. I was quite miffed that I hadn't been asked how I felt about it or even warned that this deal was coming. It sure didn't make me feel like one of the owners, and now I'm not.

It is the problem of the absentee landlord, or the Regent; management soon begins to rule in it's own interest.

The problem is that stocks are too finely divided, owned too broadly and too indirectly. I wonder how to fix that situation.

how do you figure the market is "zero sum"? The market is not zero-sum unless I am missing what you are referring to. And the ownership of stock translates to the ownership of the company only really if you possess a majority share. If you have enough, you can also be represented on the board, and certain share types grant voting rights.

When the market is gambling on fluctuating prices and is either being driven by speculation like a ponzi scheme or by inflation, then it is in some way zero sum; but a real analysis of this requires much more context.

FirstInLastOut:

how do you figure the market is "zero sum"? The market is not zero-sum unless I am missing what you are referring to. And the ownership of stock translates to the ownership of the company only really if you possess a majority share. If you have enough, you can also be represented on the board, and certain share types grant voting rights.

The market is zero sum in the sense that the market is essentially a series of trades of shares for money. Throughout any trade the total amount of shares and the total amount of money remain the same, they are simply distributed differently among the traders. The intrinsic value of the shares (the value of the underlying) is also not affected by this trade. Hence the trade of existing shares is zero sum.

The main point I was trying to get across is that there is no global profit from the trading or holding of existing stocks. Indeed increased amounts spent on the ownership of shares may cause indirect global loss by taking money away from other markets which can create global profits (venture capital, bonds etc).

You do make the legitimate point that if you accrue enough stock that you can significantly affect company policy, the value of the underlying asset may be changed by this ability. The trades would, thus, not be zero sum. However, to the best of my knowledge, the vast majority of trades are not made with the intent of altering company policy.

I don't see how the total amount of money stays the same. I suppose that's true if everyone tries to actually liquidate their stock holdings, but the value can and does increase even without any significant new money added to the system. Example: There are 10 shares of corp X at $10 per share. $100 was spent to initially buy these shares. 2 New investors come along and both want to buy the shares. Only 1 share is actually available for trading. Neither has actually purchased a share, but their bidding drives up the price to $15 a share after which one investor actually purchases it. Original owner spent $10, so he takes his $10 out of the market, and new owner puts $15 in, net total of $5 more money in the market. Total value of the company is $150, a gain of $50, even though only $5 of new money was added. Sure, if every share owner decided to liquidate, and there was no money to gobble it up, then prices would go to 0, but as long as the market continues to exist, it can create more wealth than the actual money put into it.

Here's the problem: Shares and Money... you can't eat them, sleep under them, talk on them, or drive them. If the stock market goes 'up' in the absence of a growth in employment and real output of useful 'stuff' then we have just experienced inflation. If people trade stocks left and right without real growth in the production underlying the companies, some win, and some lose in a distribution game - but the stuff they are distributing stays the same. This is where economists have really failed us; they perceive the market basket as complicated and somewhat impenetrable, and they don't pay it enough attention. So they end up engineering systems that just multiply dollars or accelerate their circulation (same difference). That's what happened with housing, essentially... the market basket shifted as relative pricing changed... anyway, that's a much bigger story.

yes, but you're ignoring the fact that increasing the money supply can actually cause growth. If there is a widget manufacturer that makes excellent widgets but no one has money to buy them, then he stops making them and there is a decrease in the total amount of goods. But if you print money and hand it out, giving people the means to buy the widgets, the widget manufacturer continues or even increases now due to the new demand. Of course if he doesn't increase his widget manufacturing, widget prices will just increase as circulated money increases, but growth in goods can and does often increase to meet new money. Printing money doesn't necessarily cause price increases if the # of goods are increased to match the new money.