A Single Share (in the stock market) part 1

When I was twelve I started reading the wall street journal. From that point on I became some what obsessed with it; I read every book I could find (and couldn’t find, but then hunted down) and also spent countless hours in front of a spread sheets moving numbers around. Later as I got better at coding I built more sophisticated forms of analysis and looked at the market interesting ways and even discovered things like fibonacci fractals embedded in non-linear price data. I did not find a holy grail but what I did find was a better understanding of what was going on at an objective level.

For a lot of people the stock market is this place where prices go up and down and people get rich or poor. The media reports news and a large amount of people make the best decisions they can make. However, it is easy to get lost in the complexity of it all. Even multi-billion dollar companies who apparently hire the brightest people in the world still seem to have the capability to go broke. To understand the stock market all you need to do is look at is the single share.

A single share represents a percentage of a company and that has all the attributes you might think would go with owning a company except since it is such a small percentage there is no guarantee of getting a cut of profits. A share has two major ways it directly affects an economy.

  1. It can provide the owner with dividends (a cut of corporate profits)
  2. It can be taxed

Now at this point, and this is where most people may get confused, you might ask what about when share prices go up or down? This does not affect an economy. For every sale there is always a winner and a loser, the net gain will be 0. Let’s look it another way, let’s say I started a company with a single share and I sold that share for 1 billion dollars, if a poor sucker bought it from me I would be up by a billion, and they would be down by a billion. Now that person could then sell it for 2 billion, but that next person will then be out exactly the same amount of the previous two transactions (+1-1+2-2 = 0).

Money Logistics
The secondary market which is what most people know as the stock market is a way of moving money to smarter people. It functions exactly like a casino, generally speaking, the person who owns the casino is much brighter then the people who spend all day in front of a slot machine. In the same way the people that make most of the money off the stock market sell books, run tv shows, or are brokers. You will get some traders who will make money, but they will either have some form of proprietary knowledge or access to more news (they’re smarter).

The main issue with the secondary market is that moving money to intelligent people is not always a good thing. A company banking billions of dollars would not be as good for an economy as if the people that lost the money instead spent the money on physical items or personal entertainment.

Additional Tax Revenue
When an economy is doing well and people have extra money on hand they will often invest in the stock market. The more people buy the higher prices will go, this is of benefit to the government because ultimately they can tax this and it actually gives the government an influx of money. It actually acts as a wealth distribution mechanism in high times.

How we can fix the stock market

Eliminate Commissions
In the past buying shares of a company required a lot of effort, so brokers took a commission. In the digital age, the entire process can be digital. Most governments regulate corporations, so it would only make sense if the government took over the process of share acquisition. The government could take a very small flat fee (tax) per person who executes any orders in the stock market regardless of volume and not impose any volume or order restrictions.

Eliminate Market Makers
Market makers give the market liquidity and they make it easier for people to execute trades. This keeps amplitudes of the market down, but the major affect it has is that it just makes it easier to fleece the population of commissions.

Eliminate Margin Trading
Margin trading is buying shares with credit. Specifically, it is an automatic process that can bypass credit checks. If people choose to take out a loan to invest in a company that is fine, however, they should have to go through the same credit process as every other loan.

What Could and Would Change
Day trading or swing trading would decrease substantially. People would be more inclined to invest in companies that yield good dividends or have good prospects as opposed to trying to bank on short term price motion. Since both day trading and swing trading have a high rate of failure, this money would ultimately flow to better beneficiaries in the economy as a whole. Since the market does have a random nature, most people who attempted to engage in day trading would ultimately end up at 50/50 over prolonged periods of time and since there would be no commissions on every trade, this would not be a negative scenario. One of the reasons for the price motion we have today is the added hesitation of the fear of commissions. Commissions cause a large amount of irrationality when it comes to short term trading.

While it certainly wouldn’t be ideal, and never could be because of human mistakes, the market would more closely resemble the state of business as opposed to being an arbitrary slot machine where stock prices spin out of control. If the above changes were implemented the market would fundamentally change for the better and the primary market, which I will discuss in part 2, will remain untouched. In addition, this will only truly work if there are changes to other economic policies.

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