What would we do without the stock market? Would the world we fundamentally different? An interesting thing to think about is the crash of 1929 - the quoted prices of equity securities would usually be higher than a price one could transact at. (Yes, I ended with a preposition and now I'm not going to change it!).
How can share prices change so dramatically over extremely short time spans and not as dramatically over very long spans of time, e.g. 15% compounded for 8 years as opposed to 40% - 100% swings within a year?
What if I had a company that needed some equity (permanent) capital to support the business, and I went to an investor to get some money? (The year is 2027) That investor would say, "I need periodic updates and financials and meetings to ensure smooth functioning." OK. As the owner of this company, until the time I go to this investor, I don't care about the 'value' of my company; I care about profitability and cash positions.
When I do go ahead and transact with this investor, it is then that I care about the 'value' of my company because that influences how much of my company he will be owning post-transaction.
Now, assume that this owner has 23.54% of my company's shares and it has been one month since the signing and everything is hunky-dory; do I care about the 'value' of my company? May be. Three years thence, and without any further requirements for myself or for my investor buddy, I still ought to not care about the value of my company. Fifteen years hence, I have a huge-ass fight with my wife and she wants to wrest my entire stake from me! Sadly, she wins the case because she had forged the papers!! It is up to me to derive a good value for my stake because beyond a threshold, the remainder belongs to me. It is now that I care about the value of my Company. Assume that this is the year 2045. However, my investor still doesn't care about the value of his stake (the management of my company is luckily still very able.) because he wants to cash out after a further 15 years.
We should agree here that the value of my Company was largely irrelevant throughout the span that I held a stake in it.
Now for some woodoo!!! The investor looks like a really hot guy and has dozens of hot women around him. So, when I sign the document for the 23.54 %, I move into his body and he moves into mine! Funky eh? Since he owns the majority of the company, he wants to cash out a bit more... he goes to the public market after 3 years and sells a portion. Let's say he now owns 40%, I own the 23.54% and the public owns the rest. His wife (who was originally my wife, curse the bit*h!) does exactly what I had described above in the year 2045. Since the Company is performing well and I am happy with my other cash flows (and the hot girls in my life) I don't wanna sell.
Now, I have been able to see the fluctuating value of my company from the year 2027 onwards. Do you still agree that it made no material difference to my life?
What do you care what other people think?
How can share prices change so dramatically over extremely short time spans and not as dramatically over very long spans of time, e.g. 15% compounded for 8 years as opposed to 40% - 100% swings within a year?
What if I had a company that needed some equity (permanent) capital to support the business, and I went to an investor to get some money? (The year is 2027) That investor would say, "I need periodic updates and financials and meetings to ensure smooth functioning." OK. As the owner of this company, until the time I go to this investor, I don't care about the 'value' of my company; I care about profitability and cash positions.
When I do go ahead and transact with this investor, it is then that I care about the 'value' of my company because that influences how much of my company he will be owning post-transaction.
Now, assume that this owner has 23.54% of my company's shares and it has been one month since the signing and everything is hunky-dory; do I care about the 'value' of my company? May be. Three years thence, and without any further requirements for myself or for my investor buddy, I still ought to not care about the value of my company. Fifteen years hence, I have a huge-ass fight with my wife and she wants to wrest my entire stake from me! Sadly, she wins the case because she had forged the papers!! It is up to me to derive a good value for my stake because beyond a threshold, the remainder belongs to me. It is now that I care about the value of my Company. Assume that this is the year 2045. However, my investor still doesn't care about the value of his stake (the management of my company is luckily still very able.) because he wants to cash out after a further 15 years.
We should agree here that the value of my Company was largely irrelevant throughout the span that I held a stake in it.
Now for some woodoo!!! The investor looks like a really hot guy and has dozens of hot women around him. So, when I sign the document for the 23.54 %, I move into his body and he moves into mine! Funky eh? Since he owns the majority of the company, he wants to cash out a bit more... he goes to the public market after 3 years and sells a portion. Let's say he now owns 40%, I own the 23.54% and the public owns the rest. His wife (who was originally my wife, curse the bit*h!) does exactly what I had described above in the year 2045. Since the Company is performing well and I am happy with my other cash flows (and the hot girls in my life) I don't wanna sell.
Now, I have been able to see the fluctuating value of my company from the year 2027 onwards. Do you still agree that it made no material difference to my life?
What do you care what other people think?
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