Economic questions !

[Kidblop]

hey im back again, this time asking qestions about capitalist economics!

i was wondering a few things... i hope someone can explain.

First of all, what are stocks? here's what i think theyre are. Tell me if I'm wrong. A company and everything it owns is priced by ... something ? ... and that total price is broken up into a certain number of shares determined by the... board and/or executives, right?

Also, how does inflation and recession happen? the fed produces too much money? then why doesnt it just produce X number of bills a year or sumthin?

Lastly, what is the Fed's job?


THANKS!

 

[Booko]

First of all, what are stocks? here's what i think theyre are. Tell me if I'm wrong. A company and everything it owns is priced by ... something ? ... and that total price is broken up into a certain number of shares determined by the... board and/or executives, right?

Imagine you and your siblings run a company, but you want to invest some money in making it bigger -- R&D or buildings of what have you, but you don't have cash on hand to do it and you don't want to take out loans.

An alternative is to "sell" interest in your company to others, let's say your friends and neighbors. They all put in $10 or whatever beginning price you set for your stocks, and then you have cash in hand to build your business.

Over time your business grows and the assets are worth more, so the "shares" of those assets are worth more, and that means the stock price rises. Additionally, your stocks can be set up to provide dividends to make them more attractive to investors. Your board of directors (elected by the "shareholders") decide what dividends to give out during your quarterly meetings.

This doesn't all have to happen on the stock markets, incidentally.

One of my neighbors kids decided to get into the business of breeding Maine Coon cats. She sold shares in her company to her friends, relatives, and neighbors. Then she could afford to buy the breeding stock, equipment and food. When the purebred kittens were born, she sold them, making a profit. All of her investors got a share in that profit -- they were given a "dividend." The money left went into breeding the next generation of kittens.

When she finally was headed off to college and had to dismantle her "company," she took the remaining assets (mostly cash on hand) and divvied it up among the shareholders in proportion to their shares.

It was a tidy little business doing something she loved, and she made a LOT more money than she would've made working part time for minimum wage. Since the "business" was officially held by her parents, they got a tax write off on the Schedule C for business use of the home too.

Everyone benefited.

Capitalism done right is a wonderful thing.

 

[9-10ths_Penguin]

I'll take the easy question.

First of all, what are stocks? here's what i think theyre are. Tell me if I'm wrong. A company and everything it owns is priced by ... something ? ... and that total price is broken up into a certain number of shares determined by the... board and/or executives, right?

Getting there, but not quite.

Stocks are pieces ("shares") of ownership of a corporation. A corporation will set how many shares it has, and its perceived value is split between them. When a private company first decides to offer shares to the public, the current owners decide how many shares to issue. These form the initial public offering (IPO), and people buy shares from the company, which gives it a reserve of cash to launch or expand its business activities. After that, if the company wants to issue more shares (to raise more money), the board puts it to a vote at a shareholder meeting.

You can figure out the "book value" of the shares based on straight accounting: take the value of all of the assets (equipment, buildings, money in the bank, etc.) and subtract the value of all liabilities (debts, shareholder equity, etc.) to get the company book value, then divide that by the number of shares to get the book value of each share. This can give an indication of the price, but it's not the end of the story.

In reality, the price is based on whatever other people will pay for it. Two shares with the same book value can get different prices in the stock market for any number of reasons: maybe one company has good managers who will grow the company well, and the other company's board of directors have all just been arrested for fraud; maybe one offers a dividend (a regular payout for every share a person owns) and the other doesn't; maybe one set of shares are regular ones and the other set are non-voting (so the owner won't have a say in what goes on with the company). The price of a share is whatever price someone else will buy it from or sell it to you at.

Edit: Booko, you're too fast for me!

 

[Booko]

Also, how does inflation and recession happen? the fed produces too much money? then why doesnt it just produce X number of bills a year or sumthin?

Whoa! I recommend you start with the business cycle and understand that first.

Business cycle - Wikipedia, the free encyclopedia

Real Business Cycle Theory - Wikipedia, the free encyclopedia

Explanations about inflation and recession won't make a lot of sense unless you understand this first.

Lastly, what is the Fed's job?

Read the "history" section in this article:

Federal Reserve System - Wikipedia, the free encyclopedia

I'm going to be spending a week's vacation in October on Jekyll Island, GA, :beach: which was a playground for the rich over a century ago.

It was very isolated at the time and was the perfect place to hatch the Fed, without the usually NYC press snooping around.

 

[Booko]

Edit: Booko, you're too fast for me!

120wpm, bubba!