Virtually everything we buy and sell, both wholesale and retail, is auctioned to the highest bidder daily; demand for goods and services are generally satisfied by competitive auction. The foundation of Capitalism is the auction process of exchanging property. The auction is the only manner in which private property and labor can be exchanged for the highest contemporary value. Every owner desiring to sell a product will make it available to all potential buyers and strike a deal with the highest bidder.
The auction format of buying and selling surrounds us. Even our daily purchases at the supermarket or department store are an auction. Buying or not buying different goods causes prices to fluctuate in response to our demands. When we want more of certain goods or services, the asking price is raised until the competition amongst those who want to consume does not increase above the available supply. And similarly if demand falls off, prices will have to fall or potential customers will continue to leave goods on the store shelves. Our willingness to consume or not consume throughout the year is our expression of our bids for goods and services.
A stock market is an auction where representatives (called specialists) of stock brokerage companies meet to buy and sell stocks (corporate equity). Brokerages also have employees and/or self-employed stockbrokers around the country who receive buy and sell orders from their customers, and relay those orders to their exchange broker who alerts the specialist that is responsible for the particular stock that is wanted, or offered for sale. The specialist then proceeds to the area of the exchange where that stock is traded and offers to buy or sell your stock, as the case may be, by dickering with specialists from other brokerages. The buying specialists group together, facing the selling specialists, prices to sell are announced and bids to purchase are made, with each side making some adjustments until trades are made. If you the customer have offered to buy or sell at the best auction price available at that time, your order will be executed and you will receive a written record of that sale.
Originally stocks represented ownership of a company in the sense of equity, wherein the original sale of stock was insured by the collateral of manufacturing facilities and equipment, so that in the event a company went bankrupt, the stockholders would be somewhat compensated by the sale of buildings and equipment. Today, companies expand production or survive slow times by borrowing money from banks or through the sale of bonds, rather than creating and selling new stock. They use company assets as collateral for those loans or bonds, which offers some protection to banks and bondholders and none to stockholders. If the company should fail, outstanding loans and bonds may be repaid out of the sale of equipment and property, if that equipment and property still have economic value.
If a company has assets worth ten million dollars, and one million shares of stock are owned by the public, that stock is protected to a price of ten dollars per share. But if the value of that stock rises to one hundred dollars per share when speculators and investors bid up its price without regard to its equity value, then ninety-percent of that stock’s value is unprotected by company assets and profits. Its price has been inflated in a careless and economically dangerous manner. If bonds are sold to raise ten million dollars for operating capital, then the company’s assets will be used to guarantee those bonds and there will be no equity value in that stock. Bankruptcy for such a company would result in a total loss for stockholders.
Not all players in these markets are long-term investors, or consumers of resources and commodities; many are strictly short-term speculators, betting on price changes. Speculators are people who bid to own, or offer to sell all sorts of stocks, bonds, and commodities, without holding stocks to receive dividends, or holding bonds to maturity, or taking possession of commodities to produce consumable products. Their gains come directly from other peoples’ losses and their every effort is to try and read the markets, to be able to predict the actions of investors and consumers, and buy or sell on their own most favorable terms.
Speculation does not drive or strengthen the economy; it only feeds off the wealth of the economy. Speculators do not provide services and infrastructure. They have become institutionalized in our commercial real estate, bond, stock and commodity markets. Their actions in these markets conspire to create values for the pieces of paper that they buy and sell, which are different from the real market value of the assets represented by stocks, as well as the real market value of the commodities that speculators buy and sell, but never see. Political power is manipulated to regulate these investment markets for the benefit of speculators.
Speculation in stocks and other financial papers has caused the attention of the greedy to focus on the changing values of stocks, rather than on actual corporate earnings and dividends paid to investors. These changes in stock values are brought about more by the activity of speculators than by economic activities of production and consumption. The longevity of investment toward gain, from present and future profits of a company, is giving way to short term buying and selling, based solely on stock price. Speculation often drives many stock values way above or way below real current market values and earning capacity. These variations allow speculators to unduly influence trading in the markets, by encouraging investment for short-term gain through volatility, rather than long term gain via profits from the sales of goods and services. As the markets oscillate, speculators buy and sell to siphon off a portion of the flow of investment dollars coming at the markets. Whenever uncertainty arises, speculators (and investors turned into speculators by their brokers) drive the markets toward economic anarchy.
Many corporations are now more interested in how their stock price is viewed by speculators than by investors. When stock prices get somewhat above one hundred dollars per share, a round lot of one hundred shares would cost over ten thousand dollars. These higher prices tend to discourage speculators, who want to own lower price stocks, which are usually more volatile, allowing them to skim profits off that volatility. High stock prices therefore reduce the exchange activity of a stock (volatility); such that many corporations split their stock two-for-one or three-for-one, dropping the share price to one-half or one-third of its previous price, to encourage increased speculative buying of their stock.