All this talk about gambling has made me think of the stock market again. I always say that the stock market is gambling, pure and simple. Others, especially those with interests in the stock market as an institution, claim otherwise.

It seems to me that the heart of this conundrum is where the money you make comes from. And there doesn't seem to be a lot of consensus. Looking around, the Motley Fool would seem like a reasonable source of information, albeit one biased toward viewing the stock market not as a pure gambling proposition.

Here are some things they had to say on the subject:

Quote:
Unless we're talking about initial public offering shares, the reality is that [a business] will never see [money changing hands in a stock transaction]. Instead, a brokered transaction takes place on the secondary market between a buyer and a seller, neither of whom usually have any connection whatsoever with [the business] outside of a stock certificate.

So they're saying that there's virtually no connection between the holder of the stock certificate and the company. But then, later in the same article:

Quote:
The stock market is a bit more complex than that, with wealth created not just by the supply and demand tug-of-war of the market itself but by the underlying value creation ability of the individual companies that make up the market.

So now they're tying the value of a stock certificate to the company's performance. And that's certainly the way it mostly seems to work in real life. But why?

Here's where my probably mistaken understanding comes in: Once the IPO is done (ignoring other stock trades), the company in question never sees another dime as a result of the price of their stock. In addition, the people who own stock, while they technically own a piece of the company in question, don't get any direct benefit from the productivity of the company, with the apparently rare exception of stock dividends. (Maybe I'm mistaken in their rarity.) So basically, people are willing to pay more for the stock of a company that is doing well. But the link between the profitability of the company and the value of the stock seems tenuous at best, to completely psychological. It seems to me that the initial desire to own stock is based in the fact that it might be neat to own a piece of Microsoft or whoever. But it also seems that that initial desire has been lost, much like the initial argument of a long-standing feud.

Basically, what I'm getting at, is that there must be some inherent value to stocks that I'm missing. Otherwise, it seems to me that people are just buying monopoly money.

Someone please show me how I'm wrong.

But then on top of that, even if I'm completely mistaken about the missing link between stocks and the company, it's totally demonstrable that the value of stocks are completely at the whim of human psychology, ranging from the abstract desire to own a piece of Microsoft, to misunderstandings of earnings reports, to the dissemination of deliberately misleading information, to manipulation of stock prices by creating runs. This sort of thing is perhaps rare, but certainly existant nonetheless. When that sort of thing exists, how can it not be considered gambling? The risk would certainly be inversely proportional to the rarity of those sorts of pshychological events, but it's risk nonetheless.

And none of this is intended to imply that it's impossible to make money at it. It's obviously possible, as it's also possible to make money playing poker, which the stock market reminds me of (with people competing against each other and the "house", in this case brokers, taking a cut of each transaction).

There's also the argument that it's not a zero-sum game, which I think has problems, though may technically be true, which I might get into if someone can get me understanding the first part of this.