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Since the implementation of government-imposed lockdowns, the trading of company equity, also known as common stock, has seen a significant rise in popularity. Stock trading has been more accessible to the general public than ever before, thanks to the introduction of no-commission internet brokerages. Despite its widespread use, there are many misunderstandings regarding what a “stonk” is and what it symbolizes. Socrates once stated that the beginning of knowledge begins with defining things for what they are, so I’ll make an effort to describe a stock in the following paragraph.
We don’t have the 12-figure float that Warren Buffet has, and we don’t take into consideration all of the ways that post-tax cash flows may be manipulated or misallocated, leaving shareholders with absolutely nothing.
My definition of equity is more straightforward, and it incorporates some of the dangers that overlook by other purposes. Common stock is a residual ownership claim on a company that trades on a stock exchange. Because each business comprises a hierarchy of shares, with stonks at the bottom of the ladder, there is a residual amount of money available.
Consider the following scenario: a not-so-typical company with $10 billion in debt, a $3 billion market capitalization (the sum of all its assets), and $100 million in cash. The whole business holds an estimated $7.9 billion in value (half of $10 billion + $3 billion minus $100 million). Because of this, probably, bondholders will not get a complete repayment, and the stock is worth a maximum of minus $2.1 billion unless the business can refinance at a favorable rate.
In a situation in which a positive share value combines with equity markets that restrict by a zero upper constraint (i.e., the asset values on your screen cannot go below zero), what could you get? You would be right if you said that volatility was a factor. A speculator’s dream come true. To create exit liquidity, they fabricate stories about an impending pump to spread. Their narratives are straightforward and consist of a potential short squeeze, expectations of mean reversion, or last-minute rescue funding as the basis for their claims. Having self-created the pump, the con artists sell while simultaneously emphasizing that “this is just the first leg of a long journey,” and the fools left with the bill. As a common shareholder, you voluntarily agree that you have virtually little ability to influence the activities of a corporation. If your CFO chooses to issue additional debt to pursue a moon-shot project while depreciating the value of your stock, there is nothing you can do to prevent this from happening.
All shareholders depend on management teams about which they frequently know little or nothing, and they are often unaware of the different motivations that exist amongst them. What is the relationship between such incentives and low-time preference shareholders who consider in terms of 10-year increments? CEOs are fully aware that they will handsomely reward if their hazardous moves seem to be successful in the short term and that they will be long gone by the time the repercussions of their actions show themselves.
The suckers, often known as stockholders, are the ones who bear the brunt of the repercussions. The possibilities are virtually endless. The following occurs when you mix relatively brief periods of poor incentives over an extended period. Ten-year results that seem to be more like cryptocurrency charts German banking giant Deutsche Bank, long regarded as one of the world’s most respected financial organizations, has had a 10-year return of roughly minus 60%. With a 10-year return of minus 15%, General Electric, the industrial behemoth responsible for powering the United States, manufacturing the vast majority of MRI equipment used throughout hospitals, and making the jet engines we travel in, has been a disappointment to investors.