Previously, I’d mentioned that both Bagel and I are profoundly, philosophically opposed to day-trading. Today I wish to elaborate a bit on why. Again, the target audience of this blog is laypeople who’ve never day-traded, or who may never have even invested before, who are looking to simply learn more about the subject. After poking around on Facebook this past summer (and engaging in random arguments with complete strangers as I’m occasionally wont to do) I quickly discovered that many people actually don’t possess basic financial literacy and historical knowledge about the stock market. People will know about “America’s Top Model” on television but won’t have the slightest inkling about how the stock market, that is, the foundational pillar of modern capitalism, works. In fact, many people on FB –at least the folks I corresponded with this past summer– will rail insistently against all of capitalism, decrying the entire economic system as “evil” and “rigged.” And they will somehow do this without being even able to articulate to me the difference between bonds and stocks. Look, to paraphrase Josh Lyman: “…I realize as an adult not everyone shares my views of the world… and with an issue as [big as the economy] I’m prepared to accept a lot of different points of view as being perfectly valid…” but when it comes to the stock market, we’re talking about the economic engine that drives the American and global economy! A cornerstone of modern civilization! If you’re going to rant at me in dissertation-length posts on Facebook about how, “Bernie is a Genius and Capitalism is Bad,” then we’re gonna at least get the names of the damn commandments right!
You know, it’s okay; I didn’t know much of this material either until my mid-twenties. Despite having been a good student, having gone to college, and even having worked at a bank (albeit, again, not for the financial side), I was ignorant of much of the inner-workings of how the American financial system actually works. This post seeks to shed a little light on the subject. Let’s start with some basic background.
To understand what day-trading is, we need to first understand just exactly what we’re “trading.” Well, we’re trading shares of equities, or also colloquially known as “stocks” in the general parlance. Hence, the “stock market.” When you buy shares in a stock, you are buying shares –known as “equity”– in the company, and thus becoming a partial owner of that company. Now, you may only own a few shares, but that still technically qualifies you as possessing partial company ownership. For example, if you were to buy just even one share in Amazon (AMZN) — which as of this writing, currently costs $1,377.45 a piece– then that makes you a “shareholder” in Jeff Bezos’s e-commerce empire. Now of course, for us hoi polloi of the proletariat class, $1,377 is a lot! So chances are that if you’re a plebeian like me, it’ll be unlikely that you’ll own many shares of Amazon, if you own any at all. Worry not though; many other stocks –many big, famous companies with household names– have much cheaper share prices. For example, currently Facebook (FB) shares are going for ~$124 a pop and Microsoft (MSFT) shares are ~$98 apiece. So far I’ve mentioned mostly technology companies because that’s the sector I traffic in the most. But virtually every big company in America (and in the world) offer stock– Walmart (WMT) shares are currently ~$87 each and Coco-Cola (KO) cost ~$47 apiece. Btw, the parentheticals following each company name is known as the “ticker symbol” for that particular company. It’s just a shorthand code to refer to stock when you’re placing trade orders online. It’s very similar to how all airports have three-letter IATA codes that represent the airport like LAX, JFK, LHR, and SFO. One difference though, as a bit a trivia, is that company tickers can vary anywhere between 1-4 letters. For example, Citigroup (Citibank) is famously just “C” while Elon Musk’s Tesla Motor Company goes by “TSLA.” Usually, the ticker clearly represents its company, but not always. Like, it’s weird to me that Coco-Cola goes by “KO” (but, of course, there’s a backstory to that). As another bit of trivia, btw, my favorite ticker symbol is Southwest Airlines’s which goes by “LUV”— as you can see, tickers can be fun and anything they want!
Why the Stock Market Exists
The entire reason the stock market exists, at least initially when the idea was first founded and implemented, was to give people with capital (ie. cold, hard cash) a way to invest in companies that they believed in which, incidentally, needed the money. New companies often have great ideas but lack funding to pull off their visions. For example, time travel with me for a moment back to the early 1600s: You are the Dutch East India Company in the Dutch Golden Age. You’re tip of the spear for the Dutch Republic (what’s now the Kingdom of the Netherlands) ruled by the beneficent King Willem the Magnanimous and the world is your oyster! At this point in history the Dutch Empire literally spans to every corner of the globe (not that spheres have corners, but whatever): You’ve got concurrently ongoing operations in the Americas, in India and all of Asia, and everywhere else you can name. When it comes to Trans-Atlantic or Trans-Pacific shipping, your company is unrivaled in all of the seven seas. Your country –the Netherlands– is essentially the USA of the 1600s.
But a new project is coming up that requires a ton of capital investment. You’re looking to expand your shipping lines in India to extract a new kind of tea. You need to buy new ships to haul the tea leaves; employ more laborers to lift heavy crates; hire a mercenary army to keep your crew safe; etc. Where do you go when you need cold, hard cash to fund your operations? You list your company as the world’s first ever publicly traded entity (VOC) and ta-da! The money comes pouring in! Investors, individuals and other companies, think VOC is a sure-fire homerun and destined to make money hand over fist. Sure, you’ll need to burn through a ton of cash to get operations initially set up. But after all the heavy-lifting finishes, you’ll have a virtual monopoly over this particular line of tea trade and be positioned to really rake it in. This “first-time-listing” on a public exchange, btw, is called an “Initial Public Offering.” (And as an aside– if you watched 2010’s The Social Network by David Fincher and Aaron Sorkin, this is how Zuckerberg screwed over Saverin.)
So, basically: The stock market is a brilliant way for everyday plebeians –ie. you and me– to get in on the action when entrepreneurs try starting new businesses. The market connects people who have capital –investors– with companies that need capital. If those companies succeed, and you’re one of their investors, then your fortunes will rise with their tide. (And of course, if they fail and crash spectacularly, you’ll likewise see your shares go to $0 and possibly disappear entirely. Live and die by the sword; the blade always cuts both ways.) As the old adage goes though: “No risk, no reward.”
While it’s easy to look back now with 20/20 hindsight and see that Apple or Amazon is a trillion-dollar company, remember that once upon a time, it was just Jobs and Wozniak in a garage. Or likewise, Gates or Zuckerberg in a Harvard dorm room. Twenty-somethings will little more than big dreams. If you reach far back enough, every great company has humble origins. Despite all the pontificating and rambling of the Bernies of the world, the stock market –while definitely possessing a dark underbelly which, believe you me, I have huge problems with and will do some pontificating of my own in a future post– is also one of the great equalizers of wealth in our modern age. Many people just don’t participate in it out of either ignorance or fear. If you’d invested just $1,000 in Microsoft 32 years ago on March 13, 1986, when the company first went public, you’d have more than $1.6 million today. Sure, a thousand dollars isn’t nothing, especially in 1986 compared to now. But then again, it’s not exactly Rockefeller/Carnegie territory.
My point is simple: This day and age, the path to genuine wealth and riches isn’t via a salaried, 9-5 job. Not unless you’re LeBron James, Taylor Swift, or Tom Cruise. Unless you’re a star athlete, musician, or celebrity, building truly mind-boggling wealth is done largely on the back on the stock market. Jeff Bezos isn’t a multi-billionaire because he founded Amazon; he’s a multi-billionaire because he’s the majority shareholder of Amazon stock which has skyrocketed through the stratosphere. The same is true of Gates, Zuckerberg, and the late Steve Jobs. Do you know who Ronald Wayne is? He’s the third co-founder of Apple. Back in 1976, Wayne sold his 10% stake in Apple for $800. Today, those same shares in Apple would be worth more than $95 billion.
I realize now that I spent so much time giving background that I never actually got around to explaining why Bagel and I are philosophically opposed to day-trading. But this post has run pretty long already. So tune in next time! To be continued!