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Undertoad · 04-28-2005, 09:29 AM

I enjoy this stuff so I will write an analogy. Sorry folks, this is long.

I have a classic automobile, the "1948 Toadie" which I have in storage. It's kind of rare, and in excellent condition, and I bought it for 50000 shekels. It'll probably go up in value.

I can't really afford to have such a nice expensive thing, so I decide, I'm going to break it up and offer people an "investment" in my auto. I take 100 pieces of paper, and on each one I write a little contract that says the owner of the piece of paper also owns 1/100th of the car.

I take 51 of the pieces and put them in a lock box, and then I go and sell the other 49 pieces. Each piece is worth 500 shekels, since it's 1/100th of a 50000-shekel car.

Half of the buyers buy it for the investment, a few buy in because they like the idea of part-owning a classic car, a few buy in because their friend told them to... all have different motivations just like everyone walking down the street has different motivations.

Classic cars are coming into fashion, and it's not hard to imagine that the car will be worth 100000 sheckels in five years. In fact some people think it's worth 60000 sheckels right now! Boy what a great investment that would be - you'd double your money in five years - everyone wants in on that kind of action.

But it's risky, and not everyone HAS a few shekels to invest in a piece of paper. In fact, the worth of that piece of paper is going to be different to everyone. Some will feel it's not worth anything at all. Some will feel it's a trivial amount. Everyone is going to argue on the potential worth of the car, although actual car sales reports will tell you the current value fairly accurately...

Because the car's worth and future worth is in dispute, if you now go to sell that piece of paper, you'll find that some people think it's worth 300 and some think it's worth 800. The people who think it's worth 800 will not PAY 800, though, because the sellers also disagree on the worth. Some will sell for 450, because they suddenly need shekels to pay their mortgage. Some will not sell for 900 because they believe the investment is worth 1000 in 5 years and they have put the paper into their lockbox until then. But they do know what the last sale was for, and that's a good guideline for what the next sale is worth, because other people had to get together and agree on a price.

And that's the stock market, except that instead of buying 1/100th of a classic auto, you're buying 1/100000000th of General Electric. And because the stakes are so high, GE reports on its actual finances in tremendous detail all the time, and thousands of people are devoted to trying to figure out the actual worth.

What market conditions?

The value of classic cars, the number of people who have shekels to invest in something, the number of shekels available for investment, the number of people who are inclined to buy pieces of paper for investment purposes and the number of pieces of paper offered by other classic car owners. There are so many conditions that determine the value. The actual current value is whatever someone was willing to pay.

Why does the amount of transactions affect the price?

If people are interested in trading something, there is probably news about it. Let's say news comes out that there was a discovery of a mint garage full of 1948 Toadies. The actual current value of my Toadie falls dramatically! Everyone tries to sell their piece of paper. There will still be buyers at SOME price...

Why are there different purchase prices? How do they know? Who decides the prices?

That should be clear now - everyone has a different belief about the value and future value, so the price has to be agreed upon and it changes all the time.

How can market conditions be measured that quickly and precisely?

The actual price of the piece of paper tells you exactly what someone would pay for it so at that moment there is no mystery at all. Also, enormous effort is put into calculating market conditions because there is so much to be gained or lost.

Are companies at all in control of supply and demand - is it based on annual performance or predictions?

Once the pieces of paper go out, the companies can issue more paper... but they are responsible to the owners of those pieces of paper and in public companies the paper owners get together and exect a board of directors to run the company. Of course the paper owners are interested only in making the value of their paper increase. GE has no direct control over the paper that is out there. But they want to make the value of the company increase so that the value of the paper increases.

04-28-2005, 09:29 AM	#9
Undertoad Radical Centrist Join Date: Jan 2001 Location: Cottage of Prussia Posts: 31,423	I enjoy this stuff so I will write an analogy. Sorry folks, this is long. I have a classic automobile, the "1948 Toadie" which I have in storage. It's kind of rare, and in excellent condition, and I bought it for 50000 shekels. It'll probably go up in value. I can't really afford to have such a nice expensive thing, so I decide, I'm going to break it up and offer people an "investment" in my auto. I take 100 pieces of paper, and on each one I write a little contract that says the owner of the piece of paper also owns 1/100th of the car. I take 51 of the pieces and put them in a lock box, and then I go and sell the other 49 pieces. Each piece is worth 500 shekels, since it's 1/100th of a 50000-shekel car. Half of the buyers buy it for the investment, a few buy in because they like the idea of part-owning a classic car, a few buy in because their friend told them to... all have different motivations just like everyone walking down the street has different motivations. Classic cars are coming into fashion, and it's not hard to imagine that the car will be worth 100000 sheckels in five years. In fact some people think it's worth 60000 sheckels right now! Boy what a great investment that would be - you'd double your money in five years - everyone wants in on that kind of action. But it's risky, and not everyone HAS a few shekels to invest in a piece of paper. In fact, the worth of that piece of paper is going to be different to everyone. Some will feel it's not worth anything at all. Some will feel it's a trivial amount. Everyone is going to argue on the potential worth of the car, although actual car sales reports will tell you the current value fairly accurately... Because the car's worth and future worth is in dispute, if you now go to sell that piece of paper, you'll find that some people think it's worth 300 and some think it's worth 800. The people who think it's worth 800 will not PAY 800, though, because the sellers also disagree on the worth. Some will sell for 450, because they suddenly need shekels to pay their mortgage. Some will not sell for 900 because they believe the investment is worth 1000 in 5 years and they have put the paper into their lockbox until then. But they do know what the last sale was for, and that's a good guideline for what the next sale is worth, because other people had to get together and agree on a price. And that's the stock market, except that instead of buying 1/100th of a classic auto, you're buying 1/100000000th of General Electric. And because the stakes are so high, GE reports on its actual finances in tremendous detail all the time, and thousands of people are devoted to trying to figure out the actual worth. What market conditions? The value of classic cars, the number of people who have shekels to invest in something, the number of shekels available for investment, the number of people who are inclined to buy pieces of paper for investment purposes and the number of pieces of paper offered by other classic car owners. There are so many conditions that determine the value. The actual current value is whatever someone was willing to pay. Why does the amount of transactions affect the price? If people are interested in trading something, there is probably news about it. Let's say news comes out that there was a discovery of a mint garage full of 1948 Toadies. The actual current value of my Toadie falls dramatically! Everyone tries to sell their piece of paper. There will still be buyers at SOME price... Why are there different purchase prices? How do they know? Who decides the prices? That should be clear now - everyone has a different belief about the value and future value, so the price has to be agreed upon and it changes all the time. How can market conditions be measured that quickly and precisely? The actual price of the piece of paper tells you exactly what someone would pay for it so at that moment there is no mystery at all. Also, enormous effort is put into calculating market conditions because there is so much to be gained or lost. Are companies at all in control of supply and demand - is it based on annual performance or predictions? Once the pieces of paper go out, the companies can issue more paper... but they are responsible to the owners of those pieces of paper and in public companies the paper owners get together and exect a board of directors to run the company. Of course the paper owners are interested only in making the value of their paper increase. GE has no direct control over the paper that is out there. But they want to make the value of the company increase so that the value of the paper increases.