I continue to be amazed by both the share price and the ongoing debate surrounding valuation the Google corporation. Still valued at over $300, Google's share price is still one of the most ridiculously inflated stocks out there. But I'm going to save my rant about internet money for another time, right now I feel like complaining about the stock market in general.
There are hundreds of different ways of figuring out what the values of stocks should be, from simple mathematical formulas to rather detailed analytical methods. All of them have their individual merits, and all of them are ultimately wrong.
The stock market has a dirty little secret that very few people, including those who make all the money off of it realize.
A good 90% or more of all corporate shares on the market have a final value of $0.
Stocks are largely worthless. The exception to this rule are those stocks which actually pay dividends, but even these are generally far overpriced for the return they generate.
What you purchase when you buy a stock is (usually, there are a few exceptions to this too, which are really bad) a partial ability to control a company, a vote in determining who or how it is operated. For people who only buy, or can only afford, a small number of shares in a company, they usually don't actually have much of a say in corporate operations, but rather hope that those who do have closer to a controlling share know what they're doing.
Unfortunately, the real final value of having a controlling share in a company is $0. Only a very few companies actually pay the people that own them (dividends). The key realization then is that stockholders don't actually profit from the success of their company.
What stockholders want is to raise the price of their stocks. They want to do this so that they can sell those stocks to other people and make money that way.
Now, stock prices usually go up when a company performs well, but there is neither a guarantee that this will always be the case, nor an actual rational reason why that should ever be the case. There's no direct link between corporate performance and share value. All there is the the result of hundreds of thousands of stock market participants who think stock prices are connected to corporate performance.
Almost all money made on the stockmarket, almost all of the growth of the stock market, comes from attracting new money to the market. No wealth is actually generated on the market. It's called "investment", but the only actual investment that's ever done is at the IPO of a company, and that doesn't actually guarantee any new wealth comes into the stock market because the newly public company doesn't have to put any of that cash back into the market.
Anyway, it annoys me how much importance we attach to an instution which is mostly meaningless. It's an illusion. Stocks aren't capital, they have no inherent worth. Nor are they currency, and have no government guarantee of value. Their value is a purely psychological phenomenon, and not something in which anyone wisely stakes their success in without knowing exactly what it is they're dealing with, and only an unfortunately tiny number do.
Buy bonds.
The only thing I ever saw stocks good for was investing some savings more aggressively to earn towards retirement. Any money you can't afford to risk shouldn't be put into it. Its better to increase earnings and savings for security.
Point eloquently put LP, about stocks being worth almost nothing (with the exception of dividend yielding stocks).
Everyone buys into a company thinking, "oooo they're doing well, I want a piece of that!" But buying a stock does not mean that you're buying into a slice of the profit pie. That indeed is the illusion--that in buying stock, I will have direct access to the company's profits. Which of course you don't.
That being said, however, why not capitilize on the ignorance of everyone else?
