Due to its length this article is being published in two parts; Part_1 is available on this same site.
If you find it hard to compare the gambling in Las Vegas with the gambling on the New York Stock Exchange, consider the activities of each. In Las Vegas you enter a gambling casino, exchange dollars for tokens or chips and proceed to wager that certain events will occur according to your predictions. When you put money on a number at Roulette you are predicting (or at the very least hoping) that the marble will stop on your number. When you place bets in a card game you are predicting that your cards count higher than others' cards, in your game. When you put coin or tokens in a Slot machine you are predicting that the machine's parts will randomly align themselves in such a way that more money will be returned to you than you will put into the machine. All of these activities are called gambling because you are spending and receiving items of value, money; and because you may only do so legally if you cannot accurately predict the outcome of your wagers. For every winner there is a loser, if the house is the winner then the customer is the loser, and vice versa.
If you choose to place wagers on the New York Stock Exchange, you must also place money at risk and presumably be as ignorant, or at least as deluded, as other players. First you hire a broker and put money into an account, from which your broker can deduct funds when you wish to buy stocks, and into which your brokerage can put your winnings, should you be so lucky. You may contact your broker and tell him or her which stocks you would like to buy, and how much to pay. You now own a piece of some company, and your voice counts in managing your corporation, according to the percentage of ownership in your name. Your bet is that your workers and management team are going to out-produce the competition, make greater profits and return a larger dividend to you. If your corporation does do better you not only win with dividends, but your shares of stock are likely worth more than you paid. Other potential players will see the stronger position of your corporation and some of them will bid more money to buy into your game. If you should decide to sell your stock allowing someone else to take your place and risk, you will receive more money than you paid. This profit is called a capital gain.
If you guessed wrong and your corporation operated inefficiently and lost money, you would not get a dividend, and your stock might drop drastically in value, because more owners may want to sell than there are would-be owners waiting to buy. Sellers are forced to accept less and less for their stocks, potentially resulting in great losses for some. For every one who wins someone else has lost. The big difference in these two gambling industries is the length of time between wagers and the determination of profit or loss.
Brokerages that facilitate stock, bond and commodity trading, operate in a similar manner and purpose to companies that operate gambling casinos. Brokerages do not care if the markets go up or down, so long as trades are being made. The brokerages charge a fee for each trade; the more trades, the more income for brokerages. In gambling casinos the odds of winning slightly favor the casino owners when one bets against the casino; and the casinos charge players a fee for the use of their facilities when players gamble with each other. The casino owners' interest also lies in the volume of gambling; the greater the activity, the greater the income for the casinos.
Brokerage firms reap their wages and bonuses through fees from the number of stock, bond, or commodity transactions occurring. If the markets are sluggish, with relatively little trading going on, brokerages can buy and sell stocks and bonds with other brokers, kiting stock, bond and commodity values and thereby creating a mirage of investment activity. This practice is very old and is called, "Churning the market". This is principally done to provide them with cash flow and protect their stock, bond and commodity portfolios, since their net worth (and the value of their own stock) is tied to cash on hand and market value of their investments. This churning hurts on-going investment activity, because it prevents the markets from moving lower and allowing investors an opportunity to purchase stocks, bonds and commodities at a true market value.
In the United States there are three principal markets to buy and sell stock. The New York exchanges are the primary market, and the over the counter exchanges are the secondary market (NASDAQ). There is another exchange market for stocks and bonds that is referred to, as the "Third Market". The third market is a partial joining of these two markets to facilitate the selling of large blocks of stock. Which if they were offered through an exchange to individual investors would crash that stock's value, along with its paper equity, and could create large declines in the overall market if not panic and chaos.
The third market is composed of brokerages that will buy large offerings individually, or in concert with other buyers, at a set price and then resell it in small lots in the usual manner. Though the set price for these large sales is determined by prices set at auction in the exchanges, this stock is not being auctioned. It is being sold in a manner contrary to the rules of the exchanges, that all stock sales be offered in public via an auction to let buyers and sellers determine market price and value. The seller of a large block of stock is guaranteed, through the third market, to receive the highest possible price for such stocks or bonds, at the expense of unwary buyers in the regular auction markets. One person's loss is another person's gain in these markets. In the public exchange markets, if a large block of stock is offered at a price no buyer is willing to pay, it will then remain unsold or only a portion of it will sell. If it must be sold, then the price must drop until buyers agree that it has dropped to its proper value, according to supply and demand in a free market. The third market is just a creation of a controlled market to allow brokerage firms to protect the value of their own holdings and to prevent investors from profiting when other market-players' must sell.
The exchanges could have barred the sale of large blocks of stock, or limited the size and timing of all sales, but this would obviously not be a free market with prices determined by supply and demand. So they maintain the illusion of a free market by withholding knowledge and access to participate in sales, such as the third market, from the public. If the third market were a small market, as compared to the exchanges, little harm would be done to investors. But the third market is not small, it is very large and very controlled to maintain higher prices, requiring individual investors to pay more than a free market would require for many stocks and bonds.
Consider a stock market very different from the market that has developed; a new market, where brokers facilitate buying and selling but own no stock themselves. A market where short selling is illegal, and where speculation is suppressed by not permitting a purchased stock to be resold in less than 30 days without a significant penalty tax paid to the federal government. Similarly for bonds, the sale of a bond would be final, until redeemed at maturity, or a penalty greater than its lifetime yield would be assessed. And in the commodity markets only those who produce commodities could sell contracts up to the amount they can produce, and only those companies that process and consume those commodities could buy contracts, up to the amount they have a track record of consuming.
Markets with these restrictions would require different corporate structures. Workers and communities would be the largest and most stable investors in the companies they worked for or the communities they are located in. The raising of capital and investment in production would follow the path of vested interest. Which would require most corporations to be publicly owned and operated, for the benefit of consumption without debt.
Market investments like stocks, bonds and commodities are considered to be barometers, gauging the health of our economy. Market watchers are always trying to forecast future economic activity based on current activity and market trends. Trends and market activity, however, are no better barometers to predict the future than reading tea leaves. Economic activity is much more a barometer of what the markets should do than the other way around. This money circulating in these markets has no direct bearing on general economic activity associated with the production and consumption of goods and services.
Because most stock trades are between one investor and another or one speculator and another, wherein the company that issued the stock is in no way involved, the stock market could go out of business without having a catastrophic economic impact on society in general. Certainly all of the people employed in operating the stock market would be devastated, and the general misunderstanding of how these markets operate would cause psychological panic amongst other industries and the public in general, which could lead to a complete economic collapse. But such a collapse would be as unnecessary as having our whole economy collapse if Las Vegas were put out of business by a major earthquake. Certainly the workers and owners of all of the casinos and related businesses would be financially distressed and have to seek other opportunities. But the rest of society would not need to go into a panic. We deal with catastrophic weather and geological events affecting our lives and economy every year, and we take them in stride. Problems in gambling industries should never be perceived as causing negative economic impacts. A panic in the stock market could only spread to our productive economy if people are ignorant of what the stock market represents and how it operates; but then if people knew how these markets functioned they probably would avoid them altogether.
The stock market is very much a balloon market, because it contains so much air (presumed equity). For example, consider a small stock market with just ten companies. Each company has sold 10,000 shares to the public, and each company's stock is currently listed at $10.00 per share. Since stocks usually sell in lots of one hundred shares, each lot is worth $1,000.00. Each company's total shares are worth $100,000.00; making the total value of all ten companies stocks to be $1,000,000.00. If one trader comes into this market and offers $11.00 per share to purchase one hundred shares of Company-A stock, then he or she has paid a total of $1,100.00, but has only increased the real equity of that one lot of one hundred shares by $100.00. The market, however, reports that all 10,000 shares of that company's stock are up and valued at $11.00 per share. One hundred dollars has created $10,000.00 in presumed equity, for this one company's ten thousand shares of stock. All of that increased value is a fraud, because the original $100.00 in additional value went to the seller, and is in no way further associated with Stock-A. Now consider that if the seller of stock in Company-A takes the $1,100.00 and invests it in one hundred shares of Company-B, another $10,000.00 in air is created. Continue this from B to C, C to D, etc. until the seller of Company-J's stock winds up with the $1,100.00 and is out of the market. All ten companies' stock has gone up ten percent and the $100.00 in additional equity has exited the market. One hundred dollars has created $100,000.00 in paper equity in just ten trades and is out of this market, as is all money invested in stocks, it is always outside the market, the seller has the money, but no stock. Obviously, the real stock markets are much larger, with millions upon millions of stock trades daily. This unreal and presumed equity can certainly be taken out of the market in a similar manner, since so much of what is reported as equity gains is only air.
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