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| Economic question
Posted: 9/15/2008 10:18:22 AM | This quote from a Q&A I was just reading about the failure of Lehman Bros. in The Guardian :
What are the risks for other banks?
Share prices have tumbled and are likely to fall further as investors take flight from a sector that appears to be run by a group of bankers who are in denial about the extent of their mistakes and the problems their firms now face.
A flight of investors will make their situation worse because they are to a great extent dependent on their shareholders for capital. The capital provided by shareholders is the bedrock for their lending and without it they cannot continue trading.
The bit I'm not clear about here is the second part... about investors being a source of capital for the company.
I had been under the impression that, except for the initial stock offering, all the trading of stocks that goes on is not really generating money for the issuing company.
Unless the company generates new stock, or sells shares it had withheld... there is no new 'investment' revenue generated from stockholders.
That was how I thought it worked.
This article suggests that the company is getting money from shareholders though...
How does that work?
I'm trying to understand the current economy situation but I'm missing some basic information about how this 'investment' thing works. | |
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| Economic question
Posted: 9/15/2008 11:11:06 AM | Greed may be good.
Fortunately, stupidity is still bad.
This is what happens when you take out a mortgage.
The entity ( bank or mortgage company ) takes the paper your mortgage is written on and uses it as collateral for a bigger loan it takes out from another company. That company passes the paper on to another company for an even bigger loan. And so on and on it goes.
All along the way, agents get a commission for each loan transaction.
If you can't pay back the mortgage then the paper it's written on is worthless.
A loan backed by worthless collateral, is a loss.
Lot's of agents wrote lot's of mortgages to people who they knew couldn't pay.
Lot's of worthless paper got passed up the ladder all the way to Wall Street and International banks and investment houses.
If a big investment house like Lehman Bros. gets stuck with a lot of worthless paper.... well, you can see what's happened. They thought that paper was worth something. They used it as collateral to take out loans and buy stocks and stuff. Lehman Bros. was hoping the government would bail them out and the government just told them to screw themselves. The U.S. government can't bail out everybody and there's a lot bigger companies that are going to need bailing out coming around very soon. | |
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| Economic question
Posted: 9/15/2008 11:42:06 AM | ^^^Correct. Good post OP, and I'm glad to see you didn't waste everyone's time by posting this in the playground of the politics threads so it could be turned into a McCain bashfest. This is pretty serious stuff that shouldn't be being used by posters as a political football like it is over there. Folks need to grow up and wake up.
Just to elaborate a bit more on what nip said. From last weeks takeover of fannie and freddie:
"""If the banks that write mortgages to regular homebuyers can't count on Fannie and Freddie to buy their loans, they have to charge higher interest rates, tighten credit standards and demand higher downpayments - all of which is already happening and slowing a recovery in housing markets..."""
These companies like lehman buy up these mortgages and if they're performing well, then lehman will do well on the stock market, people will continue to buy stock and the company stay flush. If their investments are poorly performing then people won't buy stock of the investment houses and shift their money into treasury notes instead. If nobody wants to purchase your investment portfolios, and you're an investment portfolio firm, then you're probably in some hot water. So if no ones buying fannie and freddies mortgage bundles, the company doesn't have the money needed to cover the loans written by the smaller banks and mortgage companies, as shown here:
""" ...but bond markets have not regained confidence in Fannie and Freddie.
The amount the companies pay to borrow in the bond market has risen sharply during the past year.
Fannie and Freddie rely heavily on their ability to borrow money at good rates, which they use to buy mortgages from lenders - they now own or guarantee some $5 trillion in home loans.
Investors began shunning debt issued by Fannie and Freddie in favor of U.S. Treasury bonds. On Friday, yields on the 10-year Treasury note hit a five-month low at 3.55%, down a full percentage point from a year ago. This reflects greater demand for the perceived safety in Treasuries."""
What's surprising here is that not only did a major British bank back down from getting more involved with Lehmans, the Chinese have also cut and run. They want no part of what increasingly appears to be an economy literally not worth the paper it's printed on, thus one of the reasons for the American government to get involved. You know things are bad when the Chinese don't even want a piece of the action.
"""...Foreign central banks, particularly China's, have in recent years been among the biggest buyers of "agency" bonds, those issued by Fannie, Freddie and other government entities. But they've been backing away. Brad Setser, an economist at the Council on Foreign Relations, noted last month that Federal Reserve data showed foreign central banks were, for the first time in four years, net sellers of agency bonds."""
http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/?postversion=2008090615
Hope that helps a bit.
and there's a lot bigger companies that are going to need bailing out coming around very soon.
This is probably still just the tip of the iceberg. Financial collapse has been predicted in many circles around the world to happen before 2020 in America because Americans refuse to take their debt seriously and keep living like there's no tomorrow. The bubble has burst, but picture it more like a mushroom cloud with lots of fallout still to land. Lots of nasty bumps in the road ahead.
But most folks will probably just go back to their political bickering and continue to ignore the signs of economic collapse looming. Something quite noticeable on these threads is that whenever a freddie/fanny/subprime topic comes up, it very seldom gets posted to. Only a handful of posters here seem to actually have a bit of a clue. Funny there's so many political experts running around you'd think some of them would actually have a clue as to the state of their nation. A lot of hypocrisy floating around here these days it would seem. At least you're trying to figure stuff out which is a good sign. Hopefully more will follow your take on things.
Just a hunch, out of all the challenges facing america these days, the electorate will make their decisions this year on what the price of gas is. | |
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| Economic question
Posted: 9/15/2008 12:01:30 PM | This is a great thread and I'm getting a good education in an otherwise mysterious subject. Well, it's mysterious to me and no doubt, to the majority of people out there.
By all means, both Nipoleon and Slysterling, continue on with this. If there's anything you can add here I for one would certainly love to hear it. For example, how exactly is all of this connected to the US economy as a whole ? Okay, that probably sounds like a stupid question but please, educate me like I'm a three year old. Simple terms and the dumbed-down version for the masses.
Thank you in advance. | |
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| Economic question
Posted: 9/15/2008 12:31:04 PM | The bit I'm not clear about here is the second part... about investors being a source of capital for the company.
I had been under the impression that, except for the initial stock offering, all the trading of stocks that goes on is not really generating money for the issuing company.
Unless the company generates new stock, or sells shares it had withheld... there is no new 'investment' revenue generated from stockholders.
That was how I thought it worked.
This article suggests that the company is getting money from shareholders though...
How does that work?
OP,
Let me try answering your specific question above...
Investors buy company stock. In return, the company gets liquid funds (cash, "capital) from the investor in exchange for an ownership share in stock.
The company then uses that capital for infrastructure as well as income generation as liquid investments and operating capital. If you generate a profitable income your stockholders make money in the form of dividends and higher stock value.
If you don't generate profitable income, your stockholders become disillusioned, turn in their stock certificates and take their money out of the company.
When you have a lot of shareholders/stockholders, you have a LOT of capital to use for more income generating activities.
When you screw up, as most of the big banks did with risky derivatives, mortgage-backed securities and other such economic voodoo (yet take huge profits out for themselves in the form of exhorbitant pay, perks, stock options of their own), your investors tend to get a bit ticked off.
OR, if you've fudged about how strong the company is and thus it's likelihood of making investors more profits in the future, but it's shown to be lies, they get ticked off AGAIN.
When enough of them get ticked off, they all turn in their stocks and take out their CASH, leaving the company with lots of physical infrastructure and lots of overpaid employees and obligations, but with a shortfall of WORKING CAPITAL as well as any cushion to use to offset short-term operating capital shortfall.
Apparently this is what's happened at Lehman. And it's also happening at many other banks you haven't even heard of yet. It's just a matter of time - that's why the Fed is so eager to lend them all kinds of short-term money.
Lots of outstanding stock = lots of operating capital = the ability to take advantage of profitable situations (plus pay your bills).
Lots of FORMER stockholders = little or no operating capital = inability to pay bills, pay employees, let alone conduct a profitable business = BANKRUPTCY.
Hope the aswers your question. Wish more people would educate themselves as you're doing, instead of sleep walking in the dark and waking up to economic disaster.
It's all really very simple. It's people who make it seem so mysterious and technical - the better they can baffle you with bullsh*t, the smarter and more crucial they portray themselves to you in order to relieve you of your money. (They're call "BROKErs" for a good reason)
The events leading up to this current economic dump are not something that just happened in the past 3-5 years. What we're experiencing today is the culmination of the economic policies of political and business leaders for the past 25 years. From local retail to global megabank investment policy that went unquestioned and unchallenged by ALL in power.
Building a nation on a foundation of cards. Stupidest thing I ever heard of, or watched helplessly for the past 25 years, shaking my head.
It's about time. Then maybe we can still get back to real business instead of monkey business. And lazy cretins can get back to work instead of riding everyone elses' backs. | |
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| Economic question
Posted: 9/15/2008 12:32:24 PM |
it's mysterious to me and no doubt, to the majority of people out there...
It's all quite mysterious to most people, myself included. Funny though, both Ron Paul and ralph nader have been railing for the last 5 to 8 years predicting this VERY THING would happen. But no one listens to them. Citizens are just too smart. pfft.
If Americans want out of this mess, they should consider voting in politicians that have plans to deal with these isssues. Radical plans are necessary. Listening to all the political experts on here go on and on about mccains and Obama's plans makes me laugh. it's like two kids comparing an F+ to an E- when it comes to plans, and those plans don't incorporate their health care plans, nor last weeks freddie and fanny takeover funded by the already broke taxpayer. Couple of asshats getting primetime coverage.
how exactly is all of this connected to the US economy as a whole
That's why Americans should wake up finally from their media-induced coma and take a look at Ron Paul, OR, even anyone not connected mainstream. Not only does Paul have serious and bold and probably personally for him, dangerous, plans to get the deficits under control; he's also a doctor that understands the most fundamental of all economic equations...the knee bones connected to the leg bone that's connected to the hip bone. | |
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| Economic question
Posted: 9/15/2008 2:39:50 PM | Wantasmart1,
Ok... things are still a bit unclear to me here.
You said:
Investors buy company stock. In return, the company gets liquid funds (cash, "capital) from the investor in exchange for an ownership share in stock.
The company then uses that capital for infrastructure as well as income generation as liquid investments and operating capital. If you generate a profitable income your stockholders make money in the form of dividends and higher stock value.
If you don't generate profitable income, your stockholders become disillusioned, turn in their stock certificates and take their money out of the company.
Ok... let me see if I can simplify my confusion here...
A guy starts a company. He sells stock/shares in that company in order to generate capital to fund his operation... buy equipment and office space and whatever.
So he sells those shares and the money comes in and he buys the stuff he needs and gets to work.
Meanwhile, those stocks/shares he sold are now being traded... the initial people have sold them to other folks.
My understanding is that those sales, that trading... even if the value doubles from the initial sale price... generates no further income for the issuing company. They can only sell one share one time.
(they could release some more stock or split shares or something... but that's a different matter).
But you said
your stockholders become disillusioned, turn in their stock certificates and take their money out of the company.
That sounds like you are saying that the stockholders can show up and ask for the value of the stock from the company somehow... though I don't think that's what you mean.
(I know in a liquidation that some stockholder interests get paid off but I don't think that's what you are referring to either).
If that initial company has sold its initial shares... and for whatever reason the stockholders decide to sell off all the stock... how does that effect the actual operation of the issuing company (outside of a board firing a CEO or somesuch).
Isn't the stock, once it's sold, over and done with as far as generating cash for the issuer?
I know stock prices are viewed as being symbolic of the relative health of a company... but how do they continue to generate capital for the issuing company after they are sold to the first investors?
Again, this is the part that confuses me from the original article:
they are to a great extent dependent on their shareholders for capital.
If a 'shareholder' is someone who has already bought stock... how does he continue to be a source of 'capital'... or does he? | |
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| Economic question
Posted: 9/15/2008 4:21:24 PM | Here's another question for you - due to the volatile market situation I have put most of my funds into conservative stock. I'm middle age and everyone has always advised against that. "Go with riskier stock that has a higher payback - with greater losses." My balance is mainly conservative. From what I understand they have always based a lot of those in real estate. What would happen with those if the real estate market tanked?
After Enron, I don't 100% trust my retirement fund to be there anyway. | |
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| Economic question
Posted: 9/15/2008 5:17:31 PM | Without getting really technical- I think it helps if you consider the selling of stock to more like borrowing money. The stock purchaser has basically made a loan to the company, with the expectation of making money by earning dividends (essentially, collecting interest on the loan) or by the value of the stock increasing, or both.
If something bad happens (the company's products don't sell as well as predicted, a hurricane wipes out the factory, raw material prices skyrocket, the bottom falls out of the market they service) the perceived value of the stock diminishes and the price falls. If the investors who hold the stock panic and try to dump the stock to cut their losses, the price can collapse.
Often, a company will attempt to buy back some of the outstanding stock to prop up the stock price. Sometimes this works.
I blame the American educational system for failing to teach people about basic economics and investment strategy, or simple things like how to calculate a household budget, or even how to balance a checkbook fer chrissakes; we're certainly going to be paying the price for our ignorance now. | |
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| Economic question
Posted: 9/15/2008 5:21:19 PM | There is one other aspect that hasn't been touched on:
Joe has an idea, starts a company. Needs capital to expand, so puts 50% of the company on the market and he and his initial investors, employees, etc, hang on to the other 50%.
But if the stock price goes way up, the market capitalization of the company (number of stocks times trading price) goes way up. So Joe can borrow money cheaply, since the company is worth way more than when he first listed it. So, increasing stock price makes it easier to inject new capital.
Here's another question for you - due to the volatile market situation I have put most of my funds into conservative stock. I'm middle age and everyone has always advised against that. "Go with riskier stock that has a higher payback - with greater losses." My balance is mainly conservative. From what I understand they have always based a lot of those in real estate. What would happen with those if the real estate market tanked?
Watching the BBC, even their bank share prices have dropped by half to two thirds. There aren't any safe stocks. British banks are much more tightly regulated, and this kind of collapse shouldn't happen there - but prices are tumbling anyway.
People will keep buying Coke and Pepsi. People will need food. People will continue to consume. And now is a good time to buy - the trick is always to buy when everyone else is selling. | |
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| Economic question
Posted: 9/15/2008 5:50:31 PM |
^^^Correct. Good post OP, and I'm glad to see you didn't waste everyone's time by posting this in the playground of the politics threads so it could be turned into a McCain bashfest. This is pretty serious stuff that shouldn't be being used by posters as a political football like it is over there. Folks need to grow up and wake up.
LOL, like you just attempted?
While the mortgage info from both you and Nip is greatly appreciated by the OP as well as this not so savvy economic dolt it didn't seem that the reference was to mortgage money. It looked like the article referred to investment money. | |
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| Economic question
Posted: 9/15/2008 5:58:05 PM | Wish more people would educate themselves as you're doing, instead of sleep walking in the dark and waking up to economic disaster.It's all really very simple. It's people who make it seem so mysterious and technical - the better they can baffle you with bullsh*t, the smarter and more crucial they portray themselves to you in order to relieve you of your money. (They're call "BROKErs" for a good reason)
Never liked brokers.....
Never liked debt
Never liked debt-based economy
and they have told me: if everybody was like you, money would never move 
You bet it would not move from my pocket.
Sly, 2020, did you say??? Do you think it will take that long?
love this kind of threads, by the way. Highly educating. Better than sex and dating, Thanks OP. | |
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| Economic question
Posted: 9/15/2008 6:15:57 PM | I too am very concerned about this. No matter who you listen to, you get a different answer. I woke up this morning with a big "oh-oh". I knew something was wrong, but I don't really know the serverity of the impact.
What I would like to hear is a definition of Fannie and Freddie. Are they government entities?
If so, having the government step in seems wierd to me. And if the government is so involved, how is this "free market"? The government can screw up a soup sandwich.
I wish there were a few more women on this thread. We need to know this stuff. I'm kinda scared about the future.
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| Economic question
Posted: 9/15/2008 6:33:05 PM | I wasn't going to post here, but it appears some people here are taking some of the opinions here as fact - which they aren't - and I don't want anyone taking loopy advice and getting hurt by it.
I have a degree in economics and worked as a stockbroker at one time, before operating my own business. The op is correct about stocks - the company does not profit on them after the initial distribution. What DOES happen is that the price of their shares can affect other things- their ability to borrow for example. If the market perceives them as performing poorly - this could be seen in sales, net profits, return on investment, etc - and their share price drops as a result, they might be forced to pay higher interest rates on borrowed money.
For companies that trade in things such as mortgages, this could be fatal, as it adds tremendously to their costs. Add to this the fact that many mortgages in recent years were made in which the property was nowhere near the value of the loan - and when the economy weakens, as it has - those mortgages become vulnerable. Peope walk away from them since the house isn't worth the mortgage against it - and the lending company takes the loss. If you are a company which purchases mortgages from banks - and those mortgages do NOT have value - then you have a problem. Your asset base is devalued.
Part of the problem in all of this will be reduced cash flow - for which the (temporary) cure is borrowed money - which is either more expensive or simply not available, because the lending institutions are also in trouble and are having to restrict credit.
Someone mentioned that the Chinese are not in the market - that was a reference to buying bonds. A company (governments do this too) will put out a bond issue to finance themselves - bonds are a type of loan, the rate for which is predicated on the company's finances. Those bonds would be more expensive as well, just like a loan, if the company fundamentals are wrong.
This is a complex subject and I can tell you, most of what I've read in this forum is wrong. Best bet - call a stockbroker or financial planner and ask him to explain these things to you. Asking for advice in an online forum will get you people who tell you that stocks are 'loans' - and other foolish things. | |
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| Economic question
Posted: 9/15/2008 6:33:32 PM | 30 second Google search brought these and other results:
http://hnn.us/articles/1849.html
http://www.fanniemae.com/index.jhtml
http://www.freddiemac.com/ | |
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| Economic question
Posted: 9/15/2008 6:34:25 PM | It's all quite mysterious to most people, myself included. Funny though, both Ron Paul and ralph nader have been railing for the last 5 to 8 years predicting this VERY THING would happen. But no one listens to them. Citizens are just too smart. pfft.
As I see it, slysterling, this ties into my question earlier in the day about what I call the fallacy of support for letting high income folks keep their money in tax cuts so they can/will invest wisely. That is the conservative call, right?
We know how to spend our money better than the gov't does so let us keep it.
There is certainly an implication made that this investment will benefit us all. As Itech said in the other thread, that ol' trickle down thing.
If Americans want out of this mess, they should consider voting in politicians that have plans to deal with these isssues. Radical plans are necessary
You know as well as any of the rest of us that anyone with a suggestion of radical thinking is dead in the water politically. I was involved in trying to organize a Labor Party here in Mass.; it was impossible to get the people who were supposed to be all jeeped up about the idea to attend a meeting never mind actually DO something.
So the mainstream groups will not support a real maverick, the disorganized are too taken up with daily responsibilities to follow anyone or even walk beside them.
Not only does Paul have serious and bold and probably personally for him, dangerous, plans to get the deficits under control; he's also a doctor that understands the most fundamental of all economic equations...the knee bones connected ...
I hate to disillusion you, but, in the medical community those facilities that count on physicians for business acumen are not well run. The infrastructure is ignored, maintenance is neglected for new diagnostic toys... oops, tools.
I admit right upfront that I have not looked at Ron Paul's site so I cannot comment, but, how does he take care of the mundane, the boring? | |
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| Economic question
Posted: 9/15/2008 6:39:27 PM | What I would like to hear is a definition of Fannie and Freddie. Are they government entities?
They are now but up until recently they were publicly traded companies who's stock is now virtually worthless(.61 as of today).Freddie Mac lends money to banks and Fannie Mae is the last resort for people with bad credit.
call a stockbroker or financial planner and ask him to explain these things to you. Asking for advice in an online forum will get you people who tell you that stocks are 'loans' - and other foolish things.
A stockbroker gets spiffs for promoting a stock so I would take their advice with a grain of salt,the advice here has been good so far.
Do your own due diligence before investing. | |
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| Economic question
Posted: 9/15/2008 6:52:50 PM |
The op is correct about stocks - the company does not profit on them after the initial distribution. What DOES happen is that the price of their shares can affect other things- their ability to borrow for example. If the market perceives them as performing poorly - this could be seen in sales, net profits, return on investment, etc - and their share price drops as a result, they might be forced to pay higher interest rates on borrowed money.
Okay, that's what I've been looking for but couldn't formulate into a question.
So it's basically economic domino-theory then ?
Since the initial offer generated working capital for the company but it was all based on ...well, actually yeah, what is it that determines the value of any single initial share price ?
Another question though : So, if those stocks eventually become worthless, what does the company in question have to pay out ? Anything at all ? Does it go belly up liquidating assets to pay somebody for those stocks (which are now worthless) ? Or is it just the shareholders themselves who bear the burden here ? If it's them, how exactly does the company lose ? I mean, in a way, assuming that the company doesn't have to reimburse the shareholders much because the stock is now worthless, there's really no risk to it. Of course, I'm playing naive here because while I don't know the consequences would be for the company other than from the consumer end of thing, it seems to me that the company can't just go creating shares that can become worthless without having to assume a certain amount of responsibility or risk. Well, I would think anyway.
I'll do this step by step and leave it at that for now.
Thanks in advance Str8talk. | |
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| Economic question
Posted: 9/15/2008 6:53:34 PM |
What are the risks for other banks?
Share prices have tumbled and are likely to fall further as investors take flight from a sector that appears to be run by a group of bankers who are in denial about the extent of their mistakes and the problems their firms now face.
A flight of investors will make their situation worse because they are to a great extent dependent on their shareholders for capital. The capital provided by shareholders is the bedrock for their lending and without it they cannot continue trading. The bit I'm not clear about here is the second part... about investors being a source of capital for the company. I had been under the impression that, except for the initial stock offering, all the trading of stocks that goes on is not really generating money for the issuing company. Unless the company generates new stock, or sells shares it had withheld... there is no new 'investment' revenue generated from stockholders. That was how I thought it worked. This article suggests that the company is getting money from shareholders though... How does that work? I'm trying to understand the current economy situation but I'm missing some basic information about how this 'investment' thing works.
Investors and shareholders are 2 different things. Investors invest, shareholders own shares.
Investors typically can put money into a company at any point, at the request of the company directors. In return they normally get a certain amount of gain from the company. They can invest directly into the company, or can even invest by loaning the company money. They can even not invest a penny, but simply provide the company with a promise note, a note that entitles the company to cash in the note, because they can show that to banks and get a loan on the basis of that note. They put money in, and they get some part of the profits and/or the assets and/or the voting shares back.
Shareholders own shares, a part of the company. Shareholders get a share of the dividends, the profits that are not re-invested into the company. They also get a share of the company if it is liquidated. Shares can only be initially bought when shares are offered, which is at the initial share offering, when the company first becomes a PLC, or at a later date, when more shares are re-issued, by devaluing the current shares. Any shares not bought are retained by the company, and then can be sold later. For instance, at the initial share offering, a company can offer 1 million shares at 50% of the company. A year later, they can offer another 0.5 million shares for another 25% of the company.
If they originally offered 1million shares for 100% of the company, they can even offer another million later, by treating the 1 million as 50%, making it 2 million shares for 100%. This is often done, when the PLC needs to raise capital in order to avoid bankruptcy and liquidation, or to forestall a massive drop in share price. This would probably need a majority vote by those who hold voting shares. But since keeping the status quo would mean a severe loss of money for all the shareholders anyway, most would be in favour of a new share offering.
HOWEVER, the simplest way to get money is to get ONE investor to cover the capital now needed, as one investor is likely to not be as demanding as thousands, or millions of shareholders. It also means that you have the opportunity to pay the investor back later on. With shares, once they've been sold, the only way to get them back is to buy every share from every shareholder, and some of the shareholders may not be willing to sell all of their shares. Also, investments can be kept out of the public eye. Public share offerings cannot. So a public share offering means that you are telling the world that your company is in trouble, which can drive the share price down even further, leading to takeover bids, more attacks on your clients from your competitors, and a lot of other problems. Also, you can receive investments any time you want, as many times as you want. But a stock offering has to be a public organised event. So stock offerings cannot be offered more than once a year, and even then, if you have one every year, it makes your company look really bad, because it makes it seem like you should have offered far more shares in the initial offering, and that makes it look like you cannot budget properly, and cannot run your accounts. Really bad PR for a company.
An investor is a private loan, or injection of capital, which you rely on for short-term investments, just to tide you over.
A shareholder is someone who demands part of your company forever, and demands that everyone knows about it, but never gets it back, so represents a long-term investment.
The point is that if banks need to raise capital in the short term, they would much rather deal with an investor than a new stock offering.
Now that Leman has gone down, potential investors are reminded of how Bearings also went down some years ago and how Northern Rock went down only a year ago. They are very worried about losing their investments, as they don't have quite the same stronghold on a PLC that the shareholders do. So they really don't want to deal with banks, and that includes anyone who wants to loan a bank money. Even other banks might decline loaning a bank money. So banks might find that the ONLY way to raise capital is by new stock offerings, and they cannot do that very often.
Imagine if a small company finds its costs have to rise because of rising prices like now. They might not have the extra funds to buy their supplies. So they cannot produce the goods to sell, or they can only produce a fraction of the goods, leading to lower profits, which lowers their ability to buy supplies still further in an ever-spiralling decline. This is only ONE scenario in which a lack of investment can lead to the liquidation of the company.
In addition, banks make money by loans and mortgages and investments themselves. But due to a certain level of risk in these ventures, they need to insure themselves against the possibility that some of these may not be repaid in full. So the banks have insurance, which is priced according to the risk. Banks used to be safe bets, so the risk was low, and so were their insurance premiums. But given that so many banks are going down, those risks go up a lot, and so do the insurance premiums. As those insurance premiums are charged as a portion of the money loans and/or invested, the banks will lose even more of their profits. Even worse, some of these loans, mortgages and investments may not find any underwriter willing to cover them. So they may not get insured at all. If a lot of those loans and mortgages default, or the investments go bad, they stand to lose a fortune.
The other side of the coin is that shareholders agreements often include the right to ensure that shareholders have a market to sell their shares, if the shareholder wants to sell them (or if the shareholder dies and the estate wants to sell them). If there is no such market, like if everyone wants to sell their shares and no-one wants to buy, the company may be forced to buy their own shares back, using the company assets. If everyone wants to sell their shares, then the company has to buy back everyone's shares. Since the total value of those shares often far exceeds the total assets of the company, the company could be forced into bankruptcy.
So the banks want to do all they can to ensure that the shareholders don't sell. They don't want another stock offering. So they need investors for when they are in need of a quick injection of cash, to help them re-invest in better ways. With the current situation, many of these potential investors are disappearing, and even current investors are refusing to invest more money, so they are not "throwing good money after bad". But with that situation, banks who are a bit short, may have no way of preventing shareholders from getting panicky, selling all of their shares, reducing the bank's assets to nil, and driving it into bankruptcy and liquidation.
This situation may have caused every bank to be in line for collapse, like a domino effect. | |
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| Economic question
Posted: 9/15/2008 6:54:43 PM |
A stockbroker gets spiffs for promoting a stock so I would take their advice with a grain of salt,
A stockbroker gets SQUAT for promoting a stock, he gets paid for selling investments. A stock PROMOTER gets paid for promoting a stock.
Keep in mind, a stockbroker only becomes successful if people profit from his advice - so right there they have a reason to give GOOD advice. A stock promoter could care less if the share issue he's promoting tanks in the market - he's paid up front by the company in many cases, or with a percentage of the take on the initial offering.
The advice in here is HUGELY uninformed - but you were right in saying that people should do their own due diligence before investing - and if they don't have a competent financial advisor, they should get one. And from what I've seen, there are NONE posting here. | |
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| Economic question
Posted: 9/15/2008 6:55:39 PM |
Asking for advice in an online forum will get you people who tell you that stocks are 'loans' - and other foolish things. And, of course, listening to know-it-all self-described "experts" will give you the most disastrous economic meltdown since the Great Depression. Nice going for the "experts."
My "loan" analogy may be flawed, but suggesting that stockholders actually own a piece of anything more tangible than a piece of paper is a bald-faced lie. Ownership implies control, and stockholders control nothing except the decision to buy or sell the paper they invest in. | |
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| Economic question
Posted: 9/15/2008 6:55:43 PM |
So, if those stocks eventually become worthless, what does the company in question have to pay out ? Anything at all ? Does it go belly up liquidating assets to pay somebody for those stocks (which are now worthless) ?
If there is value in the holdings of a company, they won't go to zero.
There are plenty of traders actively looking for publicly traded companies whose hard assets are greater than their market capitalization. These are taken over and stripped of their assets. | |
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| Economic question
Posted: 9/15/2008 6:57:57 PM | Str8talk pretty much cleared up my quandry...
When they say that they depend on their shareholder for their capital they are meaning that the actions of the shareholders... buying or sellling... driving the stock value up or down... can effect the further availability of capital for the company.
The original article I quoted had me confused because they made it sound like a more direct association.
I've never thought of stocks as 'loans'... it seems the company doesn't necessarily 'owe' you anything... though by prior agreement you might get dividends or somesuch.
As far as I know, unless the company goes under, the only way to get back the money you paid for the stock is to sell it... hoping it sells for the price you paid or better.
In a way I'm having trouble seeing this as true 'investment'... I think I'd have to own a lot of stock before I'd feel like I was part owner in a business... even then I'm not sure I'd feel I'd 'invested' so much as 'gambled'... betting money on a horse I think has a good chance to win.
Str8talk is also correct that if I'm going to figure this stuff out I'm going to have to track down a few experts... | |
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| Economic question
Posted: 9/15/2008 7:08:58 PM | simlasa,
I know how you feel.
I've understood the basic idea behind stocks and shares for some time but I don't know much about what determines the value of said stocks and shares exactly. I definitely don't know much of anything about PLC's , bonds, or the rest of it. Partially that's because I don't know which questions to ask in the first place.
Whether the advice here is good or bad is kind of a moot point I think. Getting a grip on the principles and familiarizing ourselves with the terms has the most value to me. | |
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| Economic question
Posted: 9/15/2008 7:09:08 PM | ya ya, put it on me gotta....
ok...first of all, shares are also called stocks - what generally determines the price of a share, or stock, is the demand for it. If the company/stock is popular, then prices rise. Simple example - the price of gold rises - any mining company or stock that deals with gold is likely to rise in price. If the entire industry is looking good, then companies which sell to that industry could also see a rise in share price, so in our example, companies which sell mining equipment could see a share price rise.
However, when a share is first issued by the company, there is a set price - it may go up, it may go down, but until the shares start to trade in the stock market, the price is determined by the offering company. From this initial offering, the company gets capital with which to grow. Sometimes a company will issue/sell a new class of share capital, to generate more money for operations or growth, but it's essentially the same story. There are also different 'classes' of shares - what you are asking about are common shares, which denote ownership in the company.
If the stock becomes worthless, that's another way of saying that the company itself has no value - shares are in demand because they either grow in value, or pay a dividend. If the company is failing, this will be reflected in the market through lower demand for that company's shares - i.e. a falling stock price.
The company does not have to shareholders for the stock - in one sense, the company IS the shareholders. So yes, it's the shareholders who bear the burden. That's the risk they take. Nor can the company create stock 'willy nilly' - if there is no value to the company, the shares simply won't be bought.
Shares are, in a very real sense, a measure of the value of the company.
(My old economics prof, Dr. Strauss, would be so proud of me now! Here's one to you Hans, and the beer fairy who kept our mugs full!) | |
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