Comment by mo_42
3 years ago
> Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business.
At the same time, regular people can invest in such companies at somewhat fair prices without doing much analysis. Basically, because the profits above the market average have been taken by smarter investors already. But it’s still good to always be able to put money somewhere and receive avg. market returns.
Yeah, exactly. There is absolutely no way you could have ETFs if the "quick games" were forbidden. Not only because it's the HFTs that essentially run the fund on a day to day basis (see Authorized Participant for details).
One famous example with a completely extinguished price discovery is the Soviet Union. I think this is what killed it more than any internal or international political problems.
> If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital.
This only true of companies that were underpriced. Overpriced companies, either because of hype (Pets.com), fraud (Enron) or other reasons (maybe Jim Cramer issued a buy) do not benefit from a fairer price.
>> companies can raise more capital. > This only true of companies that were underpriced.
You mean over-priced?
because if a company is underpriced, they cannot raise capital as easily, since each share they raise would be underpriced, and thus the existing shareholders actually _lose_ value.
An overpriced company is one where raising capital (via equity offering) is worth doing. If a company was under-priced, it would actually make more sense to do buybacks instead.
I agree with your point, but you misread my statement. We were talking about whether a company would have an easier time raising money once they were correctly priced.
For the reasons you listed, it was hard for the underpriced company to raise capital and too easy for the overpriced company. But those distortions go away once it is fairly priced.
I guess this could go in both directions. There are also underpriced companies.
I know that some people knew that something was wrong with Wirecard and they short sold the stock.