OT: Re: US IT jobs going overseas creating 'IT Rust Belt'.

[Dave Hull]

On Mon, 12 May 2003, Charles Steinkuehler wrote:

> It really did "vaporize", but you first have to realize that it also 
> materialzied overnight, too.

When a company goes public with it's IPO, real money is paid for the stock. It 
doesn't really materialize out of thin air, someone is paying for the stock 
with money that came from somewhere else, savings account, paycheck, credit 
card, etc.

> - Seatle Joe forms WigiCorp, a trend-of-the-minute high-tech startup.
> [snip]

> NOTE:  The share price reflects the price a buyer and seller agree on 
> for a specific sale.  While in the normal world this should reflect the 
> true market value of a company, in thinly traded stocks, or in 
> situations where investors are acting irrationally (ie everyone's trying 
> to jump on board the hotest/latest trend), prices can get disconnected 
> from reality.

Actually, over the history of the stock market, most shares trade at a 
multiple of the actual book value of a company. During the period of 
"irrational exuberrance" that multiple may have reached a historic high point.

> If one moron...er investor is willing to pay $1000 a  share for one share of 
> WigiCorp stock (instead of the "going" rate of $100), the *ENTIRE* WigiCorp 
> company (and all it's existing shareholders) get a 10X "virtual" gain.

Sure, it's a "virtual" gain. I agree, you don't gain (nor lose) anything until 
you actually sell your holdings.

> [snip]
> - When you return, WigiCorp stock has crashed.  It is now worth only 
> $0.10, and is about to be delisted.

It has crashed because shareholders sold their shares to "take profits" on 
their investment. The result is that they have flooded the market with shares 
which are no longer being snatched up by other investors, supply is great 
and demand is low.

The shareholders who sold their positions and took profits, have effectively 
taken your money for themselves. A transfer of wealth has occured, not a 
vaporizing of money.

> So...it's actually pretty easy to wave the "magic wealth creation wand", 
> and even easier to see the whole mess disappear into the thin air from 
> whence it came.

I still don't follow this. If a company goes IPO, their shares are purchased 
by investors. If the stock goes up and up as more investors chase fewer 
shares and this bubble bursts because some of the early investors start 
selling to take profits, those investors are effectively taking the money of 
those who paid more for the stock than they did, they have made money on the 
investment while those who paid more than them have now lost money (or will 
when and if they sell at a lower price than they purchased the stock at). 

No money has disappeared, it has simply transferred into the hands of those 
who bought at the low price and sold at a higher one.

-- 
Dave Hull
http://insipid.com

Under every stone lurks a politician.
		-- Aristophanes