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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (13930)	1/25/2002 3:43:57 PM
From: Maurice Winn	Read Replies (1) \| Respond to of 74559

CB, I think you are right that it's a zero sum game. An investor can only lose their savings. But that is very sad for them when they have worked all their lives to accumulate it, through hard work, savings, sweat and tears [and sometimes blood]. To lose it in a few months in a stockmarket which they don't understand would leave most people distressed. The philosophically robust will shrug it off as just another Sisyphean day. The people who sold them the shares at a too-high price have got their savings. The zero-sum is the transfer of savings from one person to another. The money, as you correctly say, is not created or destroyed. It just moves around the bank accounts. But the market cap is actually, literally destroyed and goes to money heaven [because it isn't actually money - it's only a guess at what the shares are worth]. Say Enron is one day worth $100 billion dollars and the next is worth nothing. If there are 1 billion shares and people paid somewhere between $1 and $100 [the saps who bought it on the very last day on the high bid], with an average payment of $50, then $50 billion of those investors' savings were transferred to the accounts of the previous Enron owners. But the $50 billion market cap increase from that average wasn't actually money, just a price sticker increase, just the same as putting a higher and higher price in the window of your car doesn't make it actually worth more or create wealth. When, suddenly, the company says "Oh, sorry, it's worth nothing!" the share price goes to zero, with not a share being sold. So $100 billion market cap goes "poof". But there's no money heaven it goes to. It was just a sticker price on a clapped-out car worth nothing [not to say your SUV is worth nothing, but you know what I mean]. The savers' $50 billion has been transferred to the relieved sellers who are happy. The savers' have now lost not only their $50 billion in savings but the other $50 billion which they thought they had and had been spending [using borrowed money] as though they had it. Suddenly, they not only don't have their savings, which the sellers got, but they haven't got Enron and the $100 billion either. They jump out the window or shoot themselves in the head because not only have they lost their money, but their wife and friends are going to ditch them and they are going to jail too because they didn't get the tax laws right and other financial controls which governments enforce to avoid fraud, financial mayhem and to raise funds to pay for enforcement and the financial system which the world depends on. If the poor savers managed to get a 50% margin, they would not only have put their $50 billion down, but they would have doubled up with $50 billion loaned on margin. That leaves them with $100 billion in assets, but $50 billion owed. If Enron goes overnight to zero, the banks can't clear the loans by selling the shares, so the now ruined shareholders have lost their $50 billion savings, and also owe another $50 billion. So, people can end up owing money to brokers if the shares travel down in price too fast for brokers to sell them to pay the debts. That sometimes happens and is why gaps are problematic. It's why maximum margins are allowed of 50% to initiate and 70% before extra payments must be made and why concentrated positions are not allowed with high margins and why certain shares are NOT allowed margin. The dot.coms could have turned to dot.bombs any instant and left big unpayable debts with highly-leveraged shareholders. Brokers don't like that, so limit margins, concentrated position and don't like firearms on the premises. Mq

To: Ilaine who wrote (13930)	1/26/2002 12:07:09 AM
From: Moominoid	Read Replies (1) \| Respond to of 74559

It's hard to end up owing money to the broker when buying stock on a 50% margin unless there is a very sudden fall in the market or you have everything in one stock. If you had bought ENE at $4 on 50% margin and then it fell to less than $1 the next day, you would owe money to the broker. It is easier to end up owing money in the futures/options markets where margins are smaller. Back in 1929 you could apaprently have margin for stocks as low as 10% before regulation of margin in the US was brought in. The futures and options markets are zero sum in the sense that each long position is matched by a short position, though the third parties - brokers and market makers are getting their cuts. But the zero sum aspect doesn't make any difference to the person on the losing end. In the stock market that is not the case. A long position isn't matched by a short position. - so it isn't zero sum in any sense. There are only long stocks some fraction of which are borrowed and sold short. Currency markets are also zero sum and margins are often a few percentage points only. David