My Old Blog

I would write about work but I can’t be bothered to think about it right now. It is too depressing.

So I’ll give you a little alternative education about the economics of stock offerings. Put on your thinking caps.

What is money by fiat? It is when some party, usually a government, says something is valuable and can be used for exchange and that thing (usually paper) has no value of its own. Fiat money is worth something only because people think it can be exchanged for something at a later time. If faith in the issuer disappears, so does the value of the money.

In contrast, up until WWI most currencies were back by gold or silver or some other commodity so that, in theory at least, one could trade in their paper money for some quantity of gold. (That begs the question why gold is really valuable since it has no practical purpose…again, its value is based soley on the expectation that it may be used in a later exchange.)

There are advantages and disadvantages to fiat money, which I won’t go into here, but to say that it is generally a fair system to value worthless money issued by a stable government.

One may think, “Great!! Why not just print more money, then you’d be richer?” Not really, whatever quantity of money you’ve printed represents some underlying, intrinsic value of the issuer. If you print more money, you simply dilute the value of it (inflation)….the underlying value doesn’t change. The money would just be worth less on the world market. Things would cost more at home.

So that is a little history on fiat money…what does it have to do with the stock market?

What are stock certificates? Although most of us have never seen any, they are pieces of paper, sort of like money.

What are stock certificates worth? Their worth today is based on what others think their potential for trade is in the future. If the potential for future trade is high, the stock price goes up. It sounds a lot like money so far. Its value is based on its perception of future value, which is based on the perceived underlying value of the issuer (company).

But with stocks you actually own something, right? You own a little part of the company. Money has no trade in value. Theorectically at least, stocks can be traded in for a little piece of the company.

Really? Have you ever tried to trade it in? Have you ever knocked on the door of GE headquarters and attempted to speak to the CEO waving a stock certificate in hand claiming partial ownership? Do you think your shares would get you into a board meeting? Stock certificates have the same value as money, just what others perceive the value to be.

But if a governments folds, the money is worthless, if a company goes bankrupt you own a little of it, so you would get a portion of whatever is liquidated right?

Theorectically, yes. In practice, not a chance in hell. Stockholders are dead last in the pecking order of the assets of insolvent companies.

If I remember correctly, first is accounts payable and then creditors (like a bank). Bottom line, if a company has enough assets to get all the way down to stockholders during a liquidation….they have enough money to stay in business. You’ll never see a dime if the company goes bankrupt…just like your money will be worthless if a government folds.

What about shareholder meetings? Legally, if you own even one share, you are entitled to speak at the annual shareholder meeting and your share entitles you to a vote in whatever issue is put to ballot. You do have some rights as a shareholder.

This one is the biggest joke. They hold those meetings at places like Aspen, Colorado during peak season and rent out the most expensive hotel. No normal person can afford to go.

Additionally, while you do get to vote, the vote is for issues that are already foredrawn conclusions, like a name change from AOL to AOL Time Warner. You can be sure that whatever is put to ballot is an inconsequential token decision, otherwise they would’ve made it behind closed doors.

Watch close. Here is how Wall Street creates money out of thin air in a very clever financial slight of hand: During an IPO a company issues worthless pieces of paper and we trade real money for those shares.

They started with nothing…they printed some paper (stock certificates)…we bought it, and they pocket the cash.

Usually, when a company gets large chunks of cash, they go into debt for it. But not this time. There is no debt. If a company goes insolvent, stockholders never see a dime.

So now they have a boatload of new cash and they didn’t pay a dime for it. Where did it come from? Money by Fiat….from thin air.

Remember the AOL Time Warner merger? AOL (the junior and smaller company) “bought” Time Warner for 183 billion dollars, the largest corporate merger ever.

AOL must’ve been really rich, right? No. AOL “paid” Time Warner 166 billion dollars in stock and assumed 17 billion dollars of Time Warner’s debt.

Out of pocket cost for AOL to buy Time Warner (one of the largest media conglomerates in the world): $0.

Because that stock didn’t cost them a dime. They just printed up paper and everyone gave them money.

They had just as much cash in the bank before the deal as they did after the deal. There was no additional debt. They paid nothing!!! They bought something (a media conglomerate) with nothing. Amazing.

So is it a scam? No, not really. There is always a chance it will work out for you, unlike a real scam…where you are sure to lose. You can definitely get rich in the stock market…but you can definitely get rich in Vegas too.

I’m thinking about having an IPO for me. Anyone wanna buy shares?

This entry was posted on Tuesday, August 17th, 2004 at 11:48 pm and is filed under Interesting Facts. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.