The fact that Tom now owns the shares, not the company, is the point, unfortunately, that most people miss. The issue company only has so much to do with its stock as it is concerned to keep its value reasonably high, but this is more for image than financial reasons. People who buy and sell stock do so to make money. Anyone who "plays the market", as it is most accurately described, buys stock in the hopes that the price will rise so that they can sell it later for a profit.
In other words, the company should do well enough that the share price rises so they can make money. Since the issuing company's only obligation is to increase it's share price so that others can generate income, it is not truly accurate to call the stock buyers "investors". They aren't investing in the company, they are investing in themselves. Technically, the shareholders are "owners" but for the most part they are only concerned about the share price, not the working conditions, the employees, the customers, or the products or services themselves ... or only insofar as these things have a positive influence on the share price.
The stock market, then, is really more like a casino than an investment, as one chief financial officer told me. What amazes me the most, though, is the amount of media coverage this particular casino gets. Fluctuations in the stock market are more often than not market players' emotional reactions to all kinds of events, but not really a sound indication of the health of the economy. I don't think it's ever a good idea to take your temperature in a casino.
It doesn't take a genius to realize that the kind of person who does well in prudent investment and helping local enterprise get along is really not the kind of person who does well in the rough-and-tumble world of speculation. There was a time when the government saw to it that these two realms remained separate. This was way back in 1933 when the so-called Glass-Steagall Act was passed and signed into law. Its real name was the Banking Act of 1933, and it covered a lot of territory, but for our discussion here, it separated commercial banking from speculative banking. Over time, of course, lots of folks started thinking this was old-fashioned and during Clinton's second term that was stated so definitively, in terms of the Gramm–Leach–Bliley Act of 1999, which repealed the affiliation restrictions that Glass-Steagall had imposed.
It will be recalled that back in Through a gla$$ darkly IV it was shown that a bank can only lend out (or invest; that is, put at risk) about 10 times what is has "safe in the bank". Another way of saying this is that it essentially lends out (or invests) the same capital multiple times. The trick comes when we ask ourselves what is "safe in the bank".
If a bank has ∆1,000 "safe in the bank", it can loan out or invest up to, say, ∆100,000. Some of these loans – like we described in our examples then – are relatively safe. And, if the bank lends out, say, ∆1,000 at 5% for a year, it will get back – if all goes as planned – about ∆1,020 at the end of the year (it's actually slightly more but for the purposes of illustration here, inconsequential). In other words, it lent ∆1,000 but the "value" of that loan is ∆1,020. This is to say that the value of the bank is equal to what it safely has and what it expects to have at some point in the future.
The important point here is that the bank's value is actually a fictitious number. It's not real like the ∆1,000 upon which it bases its business is real. The art which allows us to keep track of such things is, of course, accounting. Or, as I like to say, it is not "counting" but "a [that is, one particular way of] counting, but that, too, is another story. But now that the door is open for all kinds of real, kind-of-real, and even imaginary things to happen, since commercial banks may now also speculate, let's take it all a step further, next time.
Note: This series was originally published in slightly modified form on the Daily Kos.
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