I guess my previous post calls for some explaination. So instead of adding a comment, here is another post…
What I posted in the previous post is probably the best way I could describe it from the limited knowledge I have about the stock exchange.
I guess the main problem I have with stock exchanges and shares is that I dont quite understand what sets the price of a share. Again, from what I have seen, the stock price has absolutely nothing to do with how well/poorly a company is doing. Sometimes the potential that the company has is a contributing factor, but this is rather rare. What really baffles me is how even the most intelligent and knowledgeable person (even those who work high up in the company) can not predict with any degree of certainty how the share would perform in the coming weeks.
The best way I have come to understand this is (like a friend once put it), collective foolishness. If the price is going up, the stock must be good. Who cares what the company does!
Then there is that even more fundamental problem of why trade stocks in the first place. Why would anyone want to pay several hundred times the cover price of a share? The only rationale I understand is the hope that the “price” would increase in the future. Its not like the person would be getting huge dividends on the share she owns. The person simply depends on the collective foolishness of the population and his gut feeling when she decides to purchase any shares.
What value does a stock exchange add to the society? No wealth is generated. Wealth only exchanges hands. Why have a stock exchange at all?
The only semi-plausible explaination I have is that the stock exchange is an incentive for the public to invest in a company. This makes some sense. If there is no real incentive to invest, why would someone want to invest in a company! Thanks to the stock exchange, and the collective foolishness, there is a possibility that the price of the stock would increase in the future, and someone who invested wisely stands to gain a lot. But again, the collective foolishness is a primary requirement for it to work right.
One thing I should mention is that I have nothing against stocks/shares as such. Having shares and going public to raise money is great. This is what helps companies to grow. What I dont understand is the Stock Exchange.
Also, I must say that I am not at all qualified to talk about stocks, finance, and other such stuff. I barely manage to get my IT returns filed on time! I am quite sure that I am making a fundamental mistake somewhere. I would love to be proven wrong.
One last thing. An interesting movie about predicting the stock exchange behavior is Pi by one of my favourite directors. (you knew a movie reference was coming!)