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

[Charles Steinkuehler]

Dave Hull wrote:
> 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.

Absolutely...more below.

>> [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.

If you add up the amounts involved, you will see that a lot of "money" 
*HAS* disappeared.  For the lucky few who got out at (or near) the top, 
they did pretty well, and locked in "real" money.  Everyone else is 
suffering from the effects of the lower stock price on their portfolio 
bottom line, and the company itself is experiencing shock as their 
market valuation contracted by an order of magnitude (or two or three).

>> 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.

Sorry...I should have been a bit clearer on the virtual part.

There are (at least) three effects of a single stock transaction:

1) The buyer pays "real" money to the seller for a specific block of 
stock.  This is a "normal" transaction (no mystery dollers created out 
of thin air or vaproized).  The price paid by the buyer now represents 
the current market value of the stock (THIS IS IMPORTANT!).

2) The new market value of the stock created (or destroyed) some 
"virtual" wealth for all other holders of the same stock.  This "money" 
*DOES* come from thin air, or vaporize into the ether.  If you buy 1 
share at $10, and next week the WSJ says your stock is worth $20 a 
share, where's your extra $10 bill?  It's virtual money until you sell 
your stock.

3) The biggest effect, however, is on corperate valuations.  Typically 
only a small percentage of a corperation is owned by the public 
shareholders.  The fluctuations of the stock price (and the 
corresponding changes in the value of the outstanding shares) are 
typically dwarfed by the change in corperate value.  The same virtual 
wealth gain/loss that happens to individual stockholders happens to the 
corperation, except magnified, since the corperation is by definition 
100% of the equity of the company, while 100% of the outstanding stock 
might only be 20% of the company.  Note that corperations are frequently 
"buying up" their own stock (reducing the shares and % equity owned by 
the public), or selling new shares (ie: taking some shares out of the 
corporate vault and selling a bit more of the company to raise cash).

So...when the stock price goes up or down, it's the effect this has on 
corporate valuations and other shareholders that represents "virtual" 
money.

Re-read the last section of my previous e-mail (you didn't quote it) 
about giving yourself a $5 Mil. net worth.  Now get your neighbor to buy 
a share from your wife for $2.  All your shareholders have doubled their 
money (the current stock price is twice what they paid) but your wife is 
the only one who made any "real" money.  Your net worth has also soared 
to $10 million!  Just don't try to go buy a mansion, or you'll find out 
exactly how imaginary that wealth really is.  Finally, have your 
high-school buddy sell a share to your kid for a penny.  Presto, your 
net worth now dropped to $500K, your initial investors are looking at a 
99% loss, your neighbor's got a 99.5% loss (both virtual), and of all 
your investors only your wife has made any real money.  Of course, 
you're still flush with the $4 in cash you raised, but given the times, 
you probably blew it on a DQ sunday or something.

-- 
Charles Steinkuehler
charles at steinkuehler.net