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How to stock traders help society?


Pong Messiah
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This is a serious question. I have a few ideas, but won't go into them right now.

 

  • A sanitation worker helps keeps our streets from reeking of rotten garbage.
  • A pilot or bus driver helps people get to where they need to be.
  • A teacher provides a valuable daycare services for America's single-parent/two-worker households.
  • A construction worker keeps us from living in mud huts.
  • A veterinarian might save your pet's life.
  • A bartender gets people drunk.
  • A pharmacist helps get people medicine that keeps them alive/improves their quality of life.
  • Etc...

I am having a hard time thinking of any occupation that doesn't provide something to others (individuals or society) in some way. Even if it's simply providing distraction/entertainment (e.g. actor, video game programmer). Hmm...

 

So, assuming corporations are not people (at least outside of the law), how does a stock trader provide anything of use to others?

 

:confused:

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They help build my TEA retirement portfolio for my pension. (19 million of which Key Bank portfolio managers invested in Bernie Madoff's scheme). I guess they buy expensive high end things so the poor people that make them can have a job. CM will be along shortly to let us know for realz.

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Pong, this is a very vague question, as I'm not sure if you're talking about stock exchanges and equity in general, or if you're just referring to day-traders. They all have a role to play in keeping markets reasonably efficient and functional. But first you would have to understand and believe in the efficacy of equity as a means of capital formation. If you a mom-n-pop restaurant business, maybe you take it to the next level by opening several stores in your city. Then your region. But at some point, you see that the return on capital is greater than the pace at which you can raise new capital for reinvestment. So you take your company public.

 

You have built a good reputation for your business, so you go to a Wall Street underwriter. They help price out your IPO (initial public offering). Your IPO debuts-- investors give the now-public company money in exchange for stakes in the business. Capital is raised for the business. This is invested, which translates to more jobs, more factories/restaurants/etc. This is a net positive for the economy.

 

So in this exchange you have the business and the underwriter and the initial investors. But few people stop to think just how wide the investor pool is. It's not just millionaires and billion dollar institutions. Your retirement plan, 401(k), IRA, etc. are very likely invested in stocks, whether you realized it or not. So every time you contribute to your 401(k), or buy or sell shares of a mutual fund, you are ALSO a stock investor. You are (broadly speaking) investing in the health and well-being of the economy (or foreign economy). And wealth is gradually built this way.

 

Now if you were referencing traders and market makers specifically, who might only hold a security for a few minutes (as opposed to the years that retirement investors often hold funds), they also provide a pivotal role in keeping the overall securities market healthy. Market makers are essentially taking the other side of trades (which they usually will subsequently hedge) so that investors can place their trades as needed. Of course they need to see a small profit for this function. Day traders are also providing VAST amounts of liquidity to the market. If a security depended just on mom-n-pop investors to place buy and sells, liquidity would dry up. Bid/ask spreads would raise (meaning less efficient trades for retail investors). This huge reservoir of liquidity helps keep price discovery very tight, as there are always arbitragers looking for enough deviation that they can skim a fraction of a cent/share profit from misaligned prices. It helps keep things honest.

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What Evolence said. I've got a lot of my savings / retirement fund tied up in index-based mutual funds and Roth IRA's. Those professional traders build up a lot of security and buy me time that I eventually don't have to spend working. They do a lot for the portion of society smart enough to take advantage of their expertise and work.

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Pong, you could say the same thing about many jobs that don't produce an immediately visible, tangible product that you can see and touch. I remember thinking something similar to you when I was a child and seeing ads for consulting companies like Boston Consulting or Accenture or whatever, and I'd wonder, so.. what is it that these people actually do?

 

I'm not going to go into the details that Ev did because I could quickly go over your head- and I don't mean offense by that. What I'm saying is there doesn't seem to be any point in going into the details of what capital markets guys do, vs. market makers, vs. the back office, and so on, since my understanding is you don't have really any finance background nor any interest in such.

 

Stock traders, if we're going to use the term loosely here to encompass the above categories (and others), are basically just middle men. That's all they are, that's all they ever will be. But in the world of finance, they also happen to be middle men that possess certain specialized knowledge of very technical subjects and access to funding that average people don't have and probably could never acquire, either because they're too poor or too stupid (to be blunt about it- it's just the truth). I mean, theoretically, stock traders don't have to exist. Anyone that's highly intelligent, has a lot of money and a network of rich people could go out, take the FINRA Series 7, and just be their own brokerage, so to speak. But most people don't have that. In the same way, businesses wouldn't have to rely on underwriters and traders and the Goldman Sachses of the world to raise money. Theoretically, again, they just could raise all the money through bank loans. Or maybe just selling stock to friends and family privately. And of course, small businesses do both of those things. But what happens if one of those people wants to sell their share? Well, now you've just created a market, and the evil stock trader is back again. Or what if that small business grows and wants to sell millions of shares (I think the Facebook IPO had what.. some 400 million shares and a market cap of over $100 billion?).. well unless you happen to know millions of people to sell privately to, you've created the market again, and there you go- stock trader is there. The face of modern capitalism means that middle men of some kind are inevitable.

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But see, you just invalidated Pong's, "what do they do?" question because in essense you are saying it is over his head and they are middle men with access to things we don't have. Well you know what? I don't have access to drive a huge dump truck with wheels bigger than I am tall working in a mine either. They have specialized access to things too.

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Guest El Chalupacabra

Nah, you can't fool me Ms. Gordon Gekko. I saw Wall Street and The Wolf of Wall Street. I know all there is to know about what goes on and I know the Stock Market is just a giant members only private party of debauchery for stock traders and speculators, who are obscene people obscenely spending other peoples' money they stole or gained from some other ill-gotten means, and perpetually skimming the skim!

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But see, you just invalidated Pong's, "what do they do?" question because in essense you are saying it is over his head and they are middle men with access to things we don't have. Well you know what? I don't have access to drive a huge dump truck with wheels bigger than I am tall working in a mine either. They have specialized access to things too.

Nah, it didn't invalidate anything. She's totally right that I have very little interest and even less background in finance, and was fine with a simple explanation (in fact: preferred one). I have found numerous responses in this thread to be helpful, and I am pleased.

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