Best explanation of the stock market I've ever seen is the tale of the
two farmers and the mule:
Once upon a time, there were two farmers. One farmer owned a mule and
the other didn't. One day Smith decided that he needed to do some
plowing and since Mrs. Smith absolutely refused to be hitched to the
plow again, he went to see Jones about borrowing his mule. Jones
thought about it awhile and decided that he didn't want to loan out
his mule but he would sell it to Jones. After some dickering around,
Jones bought the mule for $50.
Well, Jones went ahead with his plowing but before he was finished, he
saw Smith approaching across the field. Smith had realized he needed
to plow his fields and he couldn't get either Mrs. Smith or any of the
little Smiths to pull the plow. So he headed over to Jones's to buy
back his mule. Jones realized he had an opportunity right there in
front of him and refused to sell the mule. But, after some more
dickering, Smith succeeded in convincing Jones to sell the mule for
$100 for a profit of $50.
Well, this went on for several plowing seasons with Smith selling the
mule to Jones and then turning around and buying it back before it was
too late to plow his own fields. After several years of selling the
mule back and forth with the price of the mule reaching $30,000.00.
After the most recent sale, Jones was leading the mule home and the
mule fell over dead. Smith saw the mule fall and came running out to
see what happened. On seeing the mule was dead, he looked at Jones and
said, "You know, I'm really sorry to see that mule die. We was getting
rich selling that mule!"
And that is the stock market in a nutshell, folks getting rich selling
a mule back and forth.
The real value of any company's stock is how much the stock would
receive from the proceeds from liquidating the company. Every dollar
paid for a stock over and above that small amount is the same as a
chip pushed out onto a roulette table. I don't know why people think
there is some intrinsic value in those pieces of paper that are traded
back and forth in the various stock exchanges. Well, in fact, they
aren't even pieces of paper anymore. They only exist as a ledger entry
in the books of the corporation.
There was a deal in the paper the other day with a headline to the
effect the some 700 billion dollars had evaporated out of the stock
market. There's something wrong and very misleading with that
headline. Every dollar someone spends to buy a share of stock is given
(less commissions) to the someone who sold the stock. None of it
remains in the "market". So that 700 billion dollars was never in the
stock market to "evaporate". The stock market is no less a negative
sum game than that roulette wheel I mentioned earlier.