I think a lot of newcomers to stock investing in the past year have been given the wrong ideas about the stock market.
When all of the headlines are about GameStop and Nokia and AMC and some kid who made it lost a lot of money on RobinHood, the stock market can feel like a place for gambling. Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.
Several times a week there are conversations on HN where commenters can’t understand how crypto currencies are different than stocks or how stocks are any different than gambling or why stocks can have any value without paying dividends.
I suspect many of those newcomers will be shaken out of the market during the next protracted drawdown. It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.
> Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.
This distinction is practically useless, unless you own enough shares to have even tiny sway at shareholder meetings. Owning 1/1000000000th of a company doesn't mean any extra value or power to you. The big difference between crypto coins and stock is that (some) stocks pay dividends. The ones that don't pay dividends are just speculative ticker symbols that go up and down in value--no difference from crypto names that go up and down.
There's a large difference, one of those is based on a pyramid scheme with no inherent value, and one is based on a company delivering value to customers.
With the state of the stock market companies can and do go under, but generally those doing something for people dont magically disappear overnight (like any crypto certainly can.)
> There's a large difference, one of those is based on a pyramid scheme with no inherent value, and one is based on a company delivering value to customers.
Crypto is mostly a store of wealth, similar to a currency. It's inherit value is that it is fungible, transferrable and scarce. Unlike other currencies, the supply is not at the whims of fed officials and politicians. The difference is that you can't pay taxes directly in crypto. I like it as a hedge.
Do you believe all currencies are pyramid schemes with no inherent value as they're based on nothing?
Currencies are not based on nothing. They're based on taxation. As long as a huge group of people need a currency to stay out of jail, that currency has value. (And pretty much all currencies in history have had their value imbued in them by threat of violence.)
>Crypto is mostly a store of wealth, similar to a currency.
Currencies are not meant to store wealth. They are the exact opposite, a medium of exchange. From a macroeconomic perspective wealth can only exist in the real world. E.g. you own a house, a car or a factory. When you deposit money into a bank account, you are effectively delegating wealth and letting other people use your money to obtain wealth in your place. These people net a return because of their wealth and let you have a share of their returns.
When you hoard currencies like Scrooge McDuck then you are neither spending your money, nor delegating wealth management to other people. The money has been taken out of circulation.
Then there is the other side of money/currency, money is a claim to another person's labor, meaning if you fail to act on that claim the portion of labor that this claim represents has perished because of unemployment. The solution to this problem is inflation. If labor perishes, make the claim to that labor perish as well. If you do not want to lose purchasing power you will have to invest your money. Banks let you deposit and make your money available to those who are interested in investing on your behalf. You can also put your money into financial assets that directly represent physical wealth such as ownership of a company. If banks and financial assets fail, you can still invest your money yourself.
>Unlike other currencies, the supply is not at the whims of fed officials and politicians.
Considering the vast majority of cryptocurrencies meet their demise at the hands of their creators I'm not exactly sure where the difference is. A lot of cryptocurrency people talk about how the background of the team behind the cryptocurrency is very important.
Currency is transactional, not a store of wealth. I'd say it's a bad idea to store your wealth in currency, absolutely, and I'd cite it's lack of inherent value as the reason why.
It's surprising to me how ignorant people commenting here know about cryptocurrencies. I would have thought this group would be immune to being so confidently incorrect but once in a while a topic comes up that I know a bit more about than average and I suddenly realize the Hacker News commenters are no different than any average bunch on a Facebook group but perhaps because they are experts in their narrow field they feel it makes them an expert in any field perhaps. All the better for those of us in the know though I guess: Keep calm and HODL on!
I think the stock market has to a large extent (but not entirely) divorced itself from having much to do with the underlying value of companies or companies' business fundamentals. I can't otherwise explain astronomical P/E ratios and meme stocks.
Sure, but this is already priced in. Most equity doesn't go completely down the toilet overnight, but it also doesn't give you spectacular overnight returns.
So it's still a game, only for lower stakes in both directions.
Proof-of-work crypto prices are based on 1) mind-share 2) sentiment/momentum 3) institutional backing (hedge funds and companies legitimizing them) 4) price of electricity 5) cost per hash 6) hardware supply 7) legality/illegality/regulation. Proof-of-stake currencies only lack #5, cost per hash. What I'm trying to say is that there's components to the price that can drive purchase/sell decisions.
Cryptocurrencies are currencies whose value lies in their technology and adoption. Neither the tech nor its users are 'nothing', they are in fact quite tangible.
Edit: (Some) Stocks that don’t pay dividends still pay you. Most stocks now don’t pay dividends. Either they reinvest in the business (growing the stock’s value) or buyback shares with extra cash, (alternative method to dividends as they’re returning value to you the shareholder.)
Ethereum will effectively do share buybacks starting in July. They're switching to a system that burns the majority of transaction fees. If share buybacks are equivalent to dividends, then arguably this is equivalent to paying dividends to ETH holders, funded by the fee revenue paid by users.
Yes, this is fine because the person paying for it is aware where the money ends up and the people who receive it know exactly who is giving it to them.
With pump and dumps it is often not known who the beneficiaries are.
>why stocks can have any value without paying dividends.
Well, if a company was never going to issue dividends at any time in the future, or do dividend-alternatives like buybacks or a liquidation at the end of its life (not a normal option), or anything else, its shares would be worthless. I could actually imagine a tech company going out of business before its first dividend.
Many have gone bankrupt without any form of dividend. Many others have gone on for years reinvesting in the business before doing a dividend. (I'm counting as buy-back as a dividend - with modern tax code it is currently a better way to do them)
Yes, but everyone is aware of this. Nobody talks about cryptocurrencies "going out of business", even though this is a thing that happens all the time.
Downturns are events where many participants learn how the market really works.
It’s an ugly reality check, but thankfully we have them frequently. Otherwise you get really overbought and then events like the tulip mania/bubble happen.
Also, this isn't limited to stocks - back when whale oil was a thing, there were all sorts of booms and busts, depending mostly if a ship came in with or without a whale.
Instead of Wall Street analysts, there were people with telescopes to view the incoming ships as far from port as possible to gain an information advantage.
All of my research in this suggests this behavior is hardwired into human DNA and won’t ever change.
While that is a large part of it, it also seems like an unfair simplification, for two reasons:
1. You can construct portfolios of derivatives that are almost equivalent to holding the underlying except at a smaller initial cost. This gives you nothing but flexibility in ownership.
2. Remember that fire insurance is also straight up gambling that your house will burn down. Gambling counter to your interests is what we call insurance, and the proper mix of underlying and derivative is a hedged, lower risk portfolio than just the underlying.
When I buy TSLA stock I’m not gambling on the future of Tesla. I’m investing in electric vehicles. So it’s “value investing” insofar as that’s my motive for investing. Sure I could gamble with plain stocks in the market, but thats not my motive or goal. Others, sure.
Of course stocks are based on what investors think they’re worth. Thats the whole point. It’s not gambling. Tesla is worth a lot of money because people think it is. If you’re susceptible to fomo hype trains and looking for a quick buck, you’re looking at the market as a slot machine, no doubt.
Stocks pay owners other than their value in the market, too. Capitalists look to make money off the market. It doesn't mean it’s all gambling. That’s a little reductive.
When gambling, the house "always wins" over time. With options trading, that's not always the case. Anyone with a gambling addiction would be far better off doing options trading - their chances are much better.
> It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.
On the other hand, it's worth gambling in stocks because if you don't your going to lose your shirt in the upcoming inflation, so you might as well roll the dice and shot your shit at not winding up poor.
Especially since there are tax increases targeted at the rich coming down the pike that are going to absolutely destroy you if you are middle class or poor, when a mcdouble costs $20 instead of $2 and the minimum wage is $100/hr instead of $15
The longer the bubble builds the bigger the bust. We’ve chosen growth over stability, fundamentals, and robustness. Once the U.S. struggles to stimulate its economy through deficit spending it’ll hit a wall. It’ll be fine for people but there will be a massive dislocation in the economy.
This is an argument in favor of pushing up inflation as soon as possible. Ideally inflation should be 2% and interest rates should be between 3-4% and it should stay that way forever.
If there is a discrepancy from that ideal then it means that something is going wrong, and the longer that discrepancy lasts, the more things are going wrong. Those wrong things will be discovered as soon as interest rates are back to their normal level.
As long as people are still unemployed there should be no reason for the US with its sovereign currency to struggle stimulating the economy.
Even if you guys would overshoot full employment your current president doesn't seem too frightened by the idea of taxing coins out of existence again.
I understand this. I'd much rather deal with the bad decisions of yesterday today than tomorrow. I guess for people that won't be alive in twenty years this is immaterial..
When all of the headlines are about GameStop and Nokia and AMC and some kid who made it lost a lot of money on RobinHood, the stock market can feel like a place for gambling. Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.
Several times a week there are conversations on HN where commenters can’t understand how crypto currencies are different than stocks or how stocks are any different than gambling or why stocks can have any value without paying dividends.
I suspect many of those newcomers will be shaken out of the market during the next protracted drawdown. It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.