Newbie questions on stock market.

Discussion in 'Stock Market' started by DustyInfinity, Jul 20, 2018.

  1. DustyInfinity
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    DustyInfinity VIP Member

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    I've never had enough money to play the markets, and I'll admit I don't really know what they are. I always viewed the market as a game. You buy trading cards, and with random perceptions, your cards value could increase. I wonder if someone could help me with corporate structure. It puzzles me that stocks are viewed as ownership. Whoever buys the most wins, right. So if someone in China decides hey, I'd like a fortune 500 company, and I'm filthy rich, I'll just buy ownership? So do top stock holders sit on a board and pay the CEO who makes half a billion a year? Isn't that chaotic. Wouldn't ownership be fluid? Who creates a company they do not own? I apologize for my ignorance, but I'm curious how the game works. You have to love games where if you lose, you take a swan dive off a tall building.
     
  2. Toro
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    Toro Diamond Member

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    I've been working in the investment business for over 20 years. I've seen everything. I've seen raging bull markets and I've seen devastating bear markets. I've seen the very best in the business, and I've seen former greats get taken out on a stretcher. There are many ways to make money in the market and there are many ways to lose money in the market.

    But in all my years of doing this, in all my years of seeing how the best become successful, the one surefire thing you need to do to be successful is this:

    Never take advice from Ricky LIbtardo
     
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  3. Kosh
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    Kosh Quick Look Over There! Supporting Member

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    Yes this is someone that called themselves a conservative yet supported 80% of Obama policies and voted for Hilary, not sure if you can trust the word of someone like this.

    However if you have a 401k most likely you are in the stock market, just that some firm manages it for you.
     
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  4. MarathonMike
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    MarathonMike Platinum Member

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    No you cannot just buy a majority share of company stock and thus become the "owner" of the company. That is because the company controls the amount of shares available for purchase called "the float". There are active investors like Carl Icahn who have made a career buying a significant chunk of a companies float shares, maybe 10% or so. That is enough that he can exert pressure on the board and the CEO, CFO to make structural changes to the company.
     
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  5. candycorn
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    candycorn Alis volat propriis

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    I’ll admit I don’t understand 100% of it too but here is what I understand to be true.

    Last question first. “Who creates a company they do not own?” There is a difference between ownership and control.

    First a company is founded. Lets call it XYZ. After enough revenue is generated, the founders can take XYZ public—start selling shares. Lets say they divide the company up into 100 shares. The company is worth, lets say, 1,000 bucks, each share is $10. Now, if they want to retain control—they are giving up ownership by selling shares—they retain 51 shares and put 49 on the market. The 49 shares are sold for $490 and that generates capital that the company can use to expand which usually is the reason for going public in the first place.

    Now, from your post, the guy or gal in China just buys 50.1% of the outstanding shares and poof! They own the company. Not really; They have controlling shares if they have that much. They don’t “own” the company.

    As for the CEO who makes half a billion; her/his contract is with XZY company…Again; it isn’t with John Doe who is the CEO or Chairman or whatever. Unless there is some sort of bizarre quirk to the compensation structure…it’s not fluid at all. There is almost always a clause that protects the person who is the CEO. It is called the Golden Parachute. If you’re going to get tossed out of the building—and do that swan dive you mentioned—you put a Golden Parachute clause into your contract that compensates you if you’re terminated.

    Hope I’ve been helpful. There are others here who know more about corporate infrastructure than me; for sure.
     
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  6. DustyInfinity
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    DustyInfinity VIP Member

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    Thanks for the education. The whole thing still seems fishy and unnatural to me. Shares are ownership, but even the largest shareholders only have a slight chance of influence on a board. It almost sounds like a scam. It still sounds like a strange game involving trading cards. The company says hey, we will allow so many trading cards to be sold, and we will pocket the money. What a nice concept. My Coca Cola cards are worth more than your Sysco cards ect. How in the world did this stuff even get started? It seems completely counter intuitive to me. Am I just dense for having trouble wrapping my head around this concept?
     
  7. candycorn
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    candycorn Alis volat propriis

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    "Corporation, n. An ingenious device for obtaining individual profit without individual responsibility."

    - Ambrose Bierce

    The trading card analogy is almost entirely incorrect. Last year, the Houston Astros had a rookie player named Alex Bergman (sp?). He was an all-star this year. If you have his rookie card, you may have a very in-demand card based only on the potential of what the player will do in the future. Meanwhile, he could lose interest in baseball, he could get injured, he could perish if the team plane goes down….heaven forbid. According to Wikipedia, 16 of the 140 players who were voted to be Rookie of the Year had Hall of Fame careers. The rookie card of a HOF player is likely among the most valuable trading cards out there but you’d have to buy ten of them to have one pay off if the numbers hold up. Your Coca Cola card holds almost none of that sort of risks. There are risks involved of course but safeguards have been put into place. The value is judged, in large part, by the P/E ratio which doesn’t fluctuate very much on legacy stocks; the dividend history and other concrete factors. Other stocks are based almost entirely on potential. The pot stocks that are out there right now are a good example.
     
  8. fncceo
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    fncceo Gold Member

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    Here's some monkey wrenches for your understanding machine ... there are different categories of stocks.

    Common stock represents a partial ownership of the company ... one share equals one voting right.

    There are different categories of of common stock ... authorized stock is the total amount of shares allowed by company by-laws and a certain percentage of that won't be available for sale (reserve stock). A company can control it's vulnerability to takeover by placing a larger percentage of its stock in the reserve category. Issued stock are those shares available for purchase. There is treasury stock, where a company buys back issued stock and can hold in reserve, resell or even cancel the stock. Treasury stock doesn't have voting rights.

    Preferred stock comes with a fixed dividend but different voting rights ... every company is different.

    A company split its stock with a voting shareholders' approval, effectively cutting in half the percentage of outstanding stock that any one shareholder has.

    And the big wrench in the takeover machine is ... the more share you purchase, the higher the price goes. Buy too much, too quickly, and even an undervalued stock can grow in value beyond the value of the company you're attempting to take over. Many companies have market caps many times the worth of the company so it would cost way more to control that 50% than the company is remotely worth. Price to Earnings (P/E) or Price to Book Value (P/B) ratios can be really high, especially with tech companies that are popular. Historically, an '80s firm called Genentech had a P/E ration of 8000:1. Controlling 50% of that company would have cost you at least 4,000 times the present value of the company.

    CEO salaries are decided by the controlling board of any company. The average CEO salary in around 15 million a years. High profile companies will want high profile CEOs for the same reason high profile sports teams hire high priced talent ... it draws the public (in the company's case, the investing public).

    CEO compensation is most often tied to company performance, a CEO who under performs risks losing a big portion of his compensation and losing his job.

    At the end of the day, the price of the stock at any given moment is controlled by the buying and selling public. You can't buy a stock that no one wants to sell. So, to convince someone to sell, you have to offer a price over what the last sale went for (as reported by the exchange). The price will continue to rise until someone thinks it's a good idea to sell you their stock (everyone has a price). In the other direction, even a terrible stock can fall in price until someone is convinced that it's priced as a bargain and decide they want to buy. Unlike most products, price is ONLY determined by what someone is willing to pay. There is no such thing as a fixed price stock after its IPO.

    If you're still confused at this point, don't buy stock (because, unless you're buying in lots of 10,000 shares at a time, you as an individual investor will always pay more than the market price that an institutional investor will get). Instead, get with a fund that meets your investment needs and let them decide what to buy or sell and how much. There are only about 10,000 investment funds globally to choose from so it shouldn't be too hard to decide.
     
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  9. fncceo
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    fncceo Gold Member

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    This is one of the best explanations of hostile takeover I've even seen and it's starring Danny DeVito ...

     
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  10. DustyInfinity
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    DustyInfinity VIP Member

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    I'm definitely not going to put money on stocks. It is not my game. It is odd that there is a commodity that has subjective value. A bunch of experts try to predict future success, and it alters the value of an investment on a guess. I know enough that a great deal of value has no base in reality, or black and white success. Very Weird. A mixture of business and popularity.
     

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