Saturday, May 5, 2007

MMM: The Stock Market, Part 1

Alternate Dimension Andy (ADA):

The stock market is one of those magical money machines (MMMs) I was talking about before. You've heard about it. There's always some boring-ass news story about the DOW dropping seventeen points (or some such bullshit). People talk about buying "shares" of Coca-Cola. There was even that unit in high school social studies about what the stock market is.

Let me just begin by saying, I totally agree with you that this shit can be boring as hell. But since I'm here to preach to you about mastering the art of personal finance, you're gonna have to sit through this anyway.

Pretend that in your dimension, a dude named Horace invents goatee wax. Since everyone in your dimension sports a goatee, Horace is bound to make a kajillion dollars, right? Other than the fact that a kajillion isn't actually a number, Horace also has to make the goatee wax before he can sell it and make money off of it.

So, Horace makes up a few batches of goatee wax and the small-time local shops put it on their shelves (it is labeled as Horace's Amazing Fun Time Momme and Poppe Shoppe Goatee Wax And Wart Remover. Oh yeah, I didn't mention before: the goatee wax is also a wart remover). Well just as fast as Horace can make batches of this stuff, it's jumping off the shelves. Some of the other shop(pe)s in town get in touch with Horace and offer to sell his wax too.

As the number of shops carrying the product grows, the demand for Horace's product grows exponentially. The goatees just keep coming. There are too many of them. It's like a zombie movie, but instead of zombies, it's goatees, and instead of shotguns, it's goatee wax.

So Horace gets an idea. "Ah ha!" he says aloud, perhaps creating an awkward moment for all the people around him until he explains, "I shall make a machine that will facilitate the easy creation of my wart-removing goatee wax!" (Everyone then nods in silent, profound approval.)

The problem is, Horace (rich though this wax is making him) just doesn't have enough money to pay for such a machine. Even though the machine would help him make the wax a hundred times faster, even though there is demand for his product, Horace just can't afford to make a machine.

Then, Horace hears from an investment bank (What's that? We'll talk about it later.). They've heard about his amazing wart-removal wax; they use it to wax their own goatees. They want to help him raise money to get his company running. Their idea: they'll sell "pieces" of Horace's company. They'll have a total of 1,000,000 pieces, and they'll sell them for $10 each. Each of those pieces -- let's call 'em "shares of stock," -- is a tiny piece of every machine, every chair, and every potted plant that Horace's company owns. In return, Horace will get $10,000,000 to build factories. He'll also use the money to hire workers, advertise, and generally get his company running.

Now the owners of the shares of stock -- "shareholders" -- each own a bit of Horace's company. If the company sells a lot of extra goatee wax, they'll bring in a lot of money from those sales and the value of the company will increase. So too will the value of the shares increase. If the company starts buying private jets and spending too much on advertising, the value of the shares might decrease.

Now, Horace's company isn't going to make more shares of stock. If another person wants to buy shares of stock in Horace's company, he would have to find someone who already owns shares and is willing to sell them. The buyer and seller would then negotiate a price.

That might be easy if there were only a few people who knew about the shares of Horace's stock, but that brokerage that helped Horace out before made sure there were lots of shares of the stock. Lots of people know about it. And lots of people want to buy or sell shares of that stock. Wouldn't it be nice if there were a sort of flea market people could go to to buy and sell those shares of stock?

ADA, that's what the stock market is. It's a flea market where people sell pieces of companies. I'm not even fucking kidding. But instead of just imaginary facial hair wax companies, there are all kinds of companies. Hundreds of 'em.

So how do the rich make money in the stock market?
  1. They find a company that is going to make a lot of money.
  2. They "go to the stock market" and buy shares in that company.
  3. When that company is done making money, or when they need some cash, the rich sell their shares of stock in that company (for more than they purchased the shares).
It's the basic MMM formula. Now, there's certainly a lot more to say about the stock market than just this. We haven't even scratched the surface of what a dividend is, what happens when people "go to the market," and how to use the stock market effectively. This is just the beginning, and understanding it is key to understanding most of the upcoming MMMs.

Go wax your goatee. We'll talk more about this later.


Andrew said...

So where can I buy this goatee wax?

Andrew Kasper said...

The goatee wax is currently available in an alternate dimension near you.