By: Beermat
- 1st April 2015 at 11:38Permalink- Edited 1st January 1970 at 01:00
I can only speak for myself in this. To me plenty of 'tertiary' industries, including insurance and money lending, are legitimate and moral - not that what Matt deems moral matters a jot. Honestly I am not of the Guy Fawkes mask-wearing 'all bankers are immoral' brigade.
I am not sure that we need to worry where it comes from, Bruce - that might depend to a degree on your political philosophy. But let's be aware of where it comes from so as not to condone mistaken policies built on sand. The individual profits of a company - any company - are not the same as a profit for the country as a whole.
Let's say a bank gives Bill's widgets 100,000 to build a new widget factory, buy 100 tonnes of widget-making material, and employ 10 widget makers. All good. Nothing immoral. Bill successfully makes and sells sufficient widgets to pay back his loan and the interest, and still keep a little for himself. All good, the bank has made a profit, everyone got a wage and Bill gets a Quinn's Award for Industry.
But where has the money come from? It was NOT generated by the bank - they are ultimately neutral in the equation, their profits are just that, not an output, a profit. It has come from the pockets of the widget buyers, who see the value in the widget as far greater than the value of the raw material - Bill has added value by making something, and a portion of that added value now sits in the coffers of the bank. The bank did not 'generate' any value or any money, just a profit. A legitimate one, the service provided being the availability Bill needed to make the widgets. But because Bill pays back more than he borrowed, the bank are taking their profit out of the system, not creating it from nowhere.
Put another way, there is no more money in the system than there was before. However, there are more widgets, which have an intrinsic value. That was done by Bill / Bill's workers (delete according to traditional viewpoint), not the bank. It would not have happened without the bank, but that's not the same thing - as per my previous post.
That's only my intuitive view, I am not an economist and all this is arm-waving stuff.
By: Creaking Door
- 1st April 2015 at 11:52Permalink- Edited 1st January 1970 at 01:00
But what if the bottom drops out of the widget market and Bill fails to make any money and has to close the factory?
The bank hasn't made any money in interest but lost a big chunk of its capital; what is its incentive for doing this? It has taken a risk and surely it deserves to be paid something for taking that risk?
If Bill took out a loan then surely Bill needed a loan; without the bank there would be no factory so the bank has contributed to the 'added value' of the widgets.
And don't forget the widget-making machinery; the company that 'produces' the machinery would not have been able to sell it without the loan that Bill got from the bank. The bank contributed to the 'production' from this company too.
By: Beermat
- 1st April 2015 at 12:30Permalink- Edited 1st January 1970 at 01:00
Yes to most of that, the bank has taken the calculated risk and it is right it should be rewarded for doing so, etc. The function of the bank, and the legitimacy of it's actions are clear.
The bank has contributed to the generation of the added value, as did the metalwork teacher who first introduced Bill to widgets, as did the designer of the widet-o-matic, the fireman who saved the factory when the widget-o-matic exploded, the nurse who removed the singed widget from Bill's left nostril allowing him to return to work, the burglar alarm installer, the lawyer, the plumber..
But it was still the widget manufacturer who added the value. The others (except possibly the Acme Widget-o-Matic Co.) are service industries, servicing the wealth-creator, not wealth-creating themselves. Legitimately profit-making from the production of widgets, but not the same thing.
The two are not entirely symbiotic. I doubt the first hunter to chip away at a flint to make it stabbier went to a bank first, or even when he (or she) offered to make more 'stabby-flints' for his (or her) neighbours in exchange for meat and furs..
By: Creaking Door
- 1st April 2015 at 13:37Permalink- Edited 1st January 1970 at 01:00
Honestly I am not of the Guy Fawkes mask-wearing 'all bankers are immoral' brigade.
Are you sure? If production is legitimate profit-making is lending money illegitimate profit-making?
And what is wrong with service-industry? (Apart from its association with Thatcherism?) About 75% of our economy is service-industry!
So let us say that Bill doesn't go to the bank to borrow the money. Instead he is forced to make widgets one at a time by hand in his garage, however...
...over in Germany, Otto has been to the bank and has been talking to 'Deutsche Widgiten Fabrik'!
How do you rate the prospects of Bill's Widgets Limited or the Acme Widget-o-Matic Company now?
Banks, borrowing, lending, investments, stocks, shares, insurance, futures and trading are facts of life; they exist in every advanced Western (and Eastern) industrialised country (and they have for centuries). They are part of what made Britain great, they funded the industrial revolution and there is no 'immorality' in any of it. No political party, no serious political party anyway, is 'anti-banks' that is the rhetoric of revolutionaries from a previous century (and a lot of delusional 'anti-globalisation' wasters who hate the banks primarily because they don't understand finance).
Get used to 'banks' because if you don't you really will be making stone flints for your neighbour.....so to speak!
By: Beermat
- 1st April 2015 at 14:34Permalink- Edited 1st January 1970 at 01:00
I mean it constructively, CD - read what I wrote again, please.. I know you're not a knee-jerk like some on here, so it will be worth checking what I have said before arguing against something I didn't say..
Lending money is not illegitimate profit making, in my opinion, and I thought I had made my thoughts on that plain.
There is nothing wrong with service industry.
I do not hate banks. As for understanding finance - there are plenty of people working in finance who will admit to not fully understanding finance any more, but that's another issue. As I keep insisting, I do not think that banks are bad or their profits immoral. To say I do is putting words into my mouth to then argue with.
I already am used to banks and use them every day, personally and professionally. My only contention was a fairly pedantic point about raw productivity, which is NOT THE SAME AS SOCIAL WORTH, and does not detract from their necessity in a modern society.
By: Bruce
- 1st April 2015 at 15:06Permalink- Edited 1st January 1970 at 01:00
OK, lets tag on to your analogy.
The Widget company is going well. In order to raise more funds, they decide to sell the company onto the stock market. Now, the company is owned by its shareholders.
The company continues to thrive, and other shareholders come along, wanting to buy a piece of the pie. The value of the company rises, as it continues to successfully make widgets. But now, there are people making money from owning part of the company, as they sell their shares at higher prices.
By: Beermat
- 1st April 2015 at 16:47Permalink- Edited 1st January 1970 at 01:00
Nothing, I guess. I suppose its all to do with perceived value, but rather than there being an intrinsic value in the widgets themselves it's the mutually agreed value of the company that makes them that adds to wealth when it goes up. Or the company that cleans the offices of the company that makes them, or the company that provides the phones for the company that cleans the carpets of the company that makes them, or whatever. Whatever the shares are in, I can't argue with anyone buying for x and selling at x+y. At worst it's surely harmless. At best it might even be wealth creation, though I'm not sure. It makes my head hurt to follow the real value when it comes to share dealing (as opposed to virtual, ascribed value - the 'share price'). As a caveat there are some activities that really should not be managed in the interests of shareholders rather than customers. But I'm sure people guessed that already, I'll spare everyone.
EDIT - thinking about it, I guess if person A is gaining x+y by selling then the person B buying is parting with x+y at the same time, and the overall wealth in circulation is unchanged. The next time that share is traded, assuming its price has risen by z, the exchange is for x+y+z, but the actual total wealth actually in circulation still remains the same (person B picks up x+y+z, but person C PARTS WITH x+y+z at the same time, net sum zero. The only real increase is in the perceived value of the item, the share. And person B makes a profit of z. All a bit magical, really. Bit like house prices.
By: Creaking Door
- 1st April 2015 at 17:29Permalink- Edited 1st January 1970 at 01:00
Tresco buy a pint of milk from a farmer; after the costs of transportation, storage, refrigeration, advertising, interest-repayments and other overheads they sell it to you making a small profit in the process...
...let's call that profit 'z'. All a bit magical or just normal retail practice?
By: Beermat
- 1st April 2015 at 17:49Permalink- Edited 1st January 1970 at 01:00
No, that's not magical. That is indeed retail.
You buy a pint of milk. You do nothing, no transport, storage, refrigeration, advertising, interest repayments (ahem) or anything. You then sell the pint of milk for z more than you bought it for. You add no value to it, but because someone else thinks they can perform the very same trick with that very same pint of milk they will pay you z more than you paid.
Ok, not magic - but nice 'work'. NOT KNOCKING IT. No politics of jealousy. But what a system.. and not really analogous to retail. There is no 'consumer' at the end of the chain, just a chain.
By: Creaking Door
- 1st April 2015 at 21:41Permalink- Edited 1st January 1970 at 01:00
Why isn't there a consumer? The buyer of the share is buying a part of the company; that is a real thing. It exists, it has value, you can buy it and sell it.
And shares go down as well as up! The profit (or loss!) comes from the individual or company that you are trading with, not the company that the share is a part of (although buying and selling of their shares will affect the value of the whole company).
Nice work if you can get it (and with online share dealing everybody can).....but risky too! :)
By: Moggy C
- 2nd April 2015 at 08:25Permalink- Edited 1st January 1970 at 01:00
Nice work if you can get it (and with online share dealing everybody can).....but risky too! :)
There is much you can do to minimise that risk.
Remember share ownership is not largely just gambling on the company's value going up. You as a shareholder participate in the profits of the company via dividend payouts. Most people hold shares long term and get a steady, but not spectacular income from them via dividends. The actual shareprice is irrelevant unless you are buying or selling.
I have a small residual pension paying out a few hundred quid a month. I put that straight into my online share account, which is also an ISA, so I don't have to pay tax on it.
My holdings cover about twelve or fifteen companies from BP and Sainsbury at one end, and internet companies like BooHoo at the other.
I have seen the share price of all three of those named fall whilst I have been holding them, but I still get dividends when they are paid out. Conversely I have some real stars - Greggs, Greene King, Persimmon Builders which have zoomed up in price.
Overall I get a slightly better return than investing that money in a savings account. By selling the 'stars' I could show a healthy increase in my capital. If I sold the lot I think I'd still be comfortably ahead.
So spread your portfolio over a good number of companies, mix big solid businesses with small growing ones, don't invest money that you might need short-term - you don't want to be forced into selling in the middle of a stock market crash, that's when you need to be buying.
By: Creaking Door
- 2nd April 2015 at 10:46Permalink- Edited 1st January 1970 at 01:00
Yes, 'risky' was the wrong word! What I meant to convey was that there was no guarantee that the value of shares would always increase over time.
I think there is this widely held perception that share ownership is the privilege of the wealthy and that making money from share-dealing isn't 'real work' (if it is done professionally) and in fact 'shareholders' and those that trade shares are mere parasites who profit from the hard-work of decent working people!
The only dealings with shares that I've had personally was some that were part of an inheritance; as executor I quickly sold these but was surprised by the 'costs' associated even with doing this. From memory the selling fee was about 10% of the (modest) holding; if one was to make money from rapidly buying and selling shares on market fluctuations I assume you'd need a much larger holding to cover the costs of the fees?
By: Bruce
- 2nd April 2015 at 13:44Permalink- Edited 1st January 1970 at 01:00
Fees are not that great, and certainly shouldn't be as high as you have quoted there.
Playing the stock market is little different to a flutter on the horses. Anyone can do it badly. To do it well, you need to spend time with the form books, know the trainers and the riders.
Posts: 3,447
By: Beermat - 1st April 2015 at 11:38 Permalink - Edited 1st January 1970 at 01:00
I can only speak for myself in this. To me plenty of 'tertiary' industries, including insurance and money lending, are legitimate and moral - not that what Matt deems moral matters a jot. Honestly I am not of the Guy Fawkes mask-wearing 'all bankers are immoral' brigade.
I am not sure that we need to worry where it comes from, Bruce - that might depend to a degree on your political philosophy. But let's be aware of where it comes from so as not to condone mistaken policies built on sand. The individual profits of a company - any company - are not the same as a profit for the country as a whole.
Let's say a bank gives Bill's widgets 100,000 to build a new widget factory, buy 100 tonnes of widget-making material, and employ 10 widget makers. All good. Nothing immoral. Bill successfully makes and sells sufficient widgets to pay back his loan and the interest, and still keep a little for himself. All good, the bank has made a profit, everyone got a wage and Bill gets a Quinn's Award for Industry.
But where has the money come from? It was NOT generated by the bank - they are ultimately neutral in the equation, their profits are just that, not an output, a profit. It has come from the pockets of the widget buyers, who see the value in the widget as far greater than the value of the raw material - Bill has added value by making something, and a portion of that added value now sits in the coffers of the bank. The bank did not 'generate' any value or any money, just a profit. A legitimate one, the service provided being the availability Bill needed to make the widgets. But because Bill pays back more than he borrowed, the bank are taking their profit out of the system, not creating it from nowhere.
Put another way, there is no more money in the system than there was before. However, there are more widgets, which have an intrinsic value. That was done by Bill / Bill's workers (delete according to traditional viewpoint), not the bank. It would not have happened without the bank, but that's not the same thing - as per my previous post.
That's only my intuitive view, I am not an economist and all this is arm-waving stuff.
Posts: 9,739
By: Creaking Door - 1st April 2015 at 11:52 Permalink - Edited 1st January 1970 at 01:00
But what if the bottom drops out of the widget market and Bill fails to make any money and has to close the factory?
The bank hasn't made any money in interest but lost a big chunk of its capital; what is its incentive for doing this? It has taken a risk and surely it deserves to be paid something for taking that risk?
If Bill took out a loan then surely Bill needed a loan; without the bank there would be no factory so the bank has contributed to the 'added value' of the widgets.
And don't forget the widget-making machinery; the company that 'produces' the machinery would not have been able to sell it without the loan that Bill got from the bank. The bank contributed to the 'production' from this company too.
Posts: 3,447
By: Beermat - 1st April 2015 at 12:30 Permalink - Edited 1st January 1970 at 01:00
Yes to most of that, the bank has taken the calculated risk and it is right it should be rewarded for doing so, etc. The function of the bank, and the legitimacy of it's actions are clear.
The bank has contributed to the generation of the added value, as did the metalwork teacher who first introduced Bill to widgets, as did the designer of the widet-o-matic, the fireman who saved the factory when the widget-o-matic exploded, the nurse who removed the singed widget from Bill's left nostril allowing him to return to work, the burglar alarm installer, the lawyer, the plumber..
But it was still the widget manufacturer who added the value. The others (except possibly the Acme Widget-o-Matic Co.) are service industries, servicing the wealth-creator, not wealth-creating themselves. Legitimately profit-making from the production of widgets, but not the same thing.
The two are not entirely symbiotic. I doubt the first hunter to chip away at a flint to make it stabbier went to a bank first, or even when he (or she) offered to make more 'stabby-flints' for his (or her) neighbours in exchange for meat and furs..
Posts: 9,739
By: Creaking Door - 1st April 2015 at 13:37 Permalink - Edited 1st January 1970 at 01:00
Are you sure? If production is legitimate profit-making is lending money illegitimate profit-making?
And what is wrong with service-industry? (Apart from its association with Thatcherism?) About 75% of our economy is service-industry!
So let us say that Bill doesn't go to the bank to borrow the money. Instead he is forced to make widgets one at a time by hand in his garage, however...
...over in Germany, Otto has been to the bank and has been talking to 'Deutsche Widgiten Fabrik'!
How do you rate the prospects of Bill's Widgets Limited or the Acme Widget-o-Matic Company now?
Banks, borrowing, lending, investments, stocks, shares, insurance, futures and trading are facts of life; they exist in every advanced Western (and Eastern) industrialised country (and they have for centuries). They are part of what made Britain great, they funded the industrial revolution and there is no 'immorality' in any of it. No political party, no serious political party anyway, is 'anti-banks' that is the rhetoric of revolutionaries from a previous century (and a lot of delusional 'anti-globalisation' wasters who hate the banks primarily because they don't understand finance).
Get used to 'banks' because if you don't you really will be making stone flints for your neighbour.....so to speak!
Posts: 3,447
By: Beermat - 1st April 2015 at 14:34 Permalink - Edited 1st January 1970 at 01:00
I mean it constructively, CD - read what I wrote again, please.. I know you're not a knee-jerk like some on here, so it will be worth checking what I have said before arguing against something I didn't say..
Lending money is not illegitimate profit making, in my opinion, and I thought I had made my thoughts on that plain.
There is nothing wrong with service industry.
I do not hate banks. As for understanding finance - there are plenty of people working in finance who will admit to not fully understanding finance any more, but that's another issue. As I keep insisting, I do not think that banks are bad or their profits immoral. To say I do is putting words into my mouth to then argue with.
I already am used to banks and use them every day, personally and professionally. My only contention was a fairly pedantic point about raw productivity, which is NOT THE SAME AS SOCIAL WORTH, and does not detract from their necessity in a modern society.
Posts: 9,739
By: Creaking Door - 1st April 2015 at 14:46 Permalink - Edited 1st January 1970 at 01:00
My apologies; I didn't wish to put words into your mouth. I accept your 'pedantic' point about productivity! :)
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By: Beermat - 1st April 2015 at 14:51 Permalink - Edited 1st January 1970 at 01:00
Oh cr*p. What are we going to argue about now? :very_drunk:
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By: Bruce - 1st April 2015 at 15:06 Permalink - Edited 1st January 1970 at 01:00
OK, lets tag on to your analogy.
The Widget company is going well. In order to raise more funds, they decide to sell the company onto the stock market. Now, the company is owned by its shareholders.
The company continues to thrive, and other shareholders come along, wanting to buy a piece of the pie. The value of the company rises, as it continues to successfully make widgets. But now, there are people making money from owning part of the company, as they sell their shares at higher prices.
Which is where investment banking comes in.
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By: Creaking Door - 1st April 2015 at 15:24 Permalink - Edited 1st January 1970 at 01:00
And where my understanding gets a bit more sketchy!
But the investment bank does own something; the 'share' they bought (with good money) is exactly that...
...it is a share of the company. So what is wrong with trading and profiting from their shares?
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By: Beermat - 1st April 2015 at 16:47 Permalink - Edited 1st January 1970 at 01:00
Nothing, I guess. I suppose its all to do with perceived value, but rather than there being an intrinsic value in the widgets themselves it's the mutually agreed value of the company that makes them that adds to wealth when it goes up. Or the company that cleans the offices of the company that makes them, or the company that provides the phones for the company that cleans the carpets of the company that makes them, or whatever. Whatever the shares are in, I can't argue with anyone buying for x and selling at x+y. At worst it's surely harmless. At best it might even be wealth creation, though I'm not sure. It makes my head hurt to follow the real value when it comes to share dealing (as opposed to virtual, ascribed value - the 'share price'). As a caveat there are some activities that really should not be managed in the interests of shareholders rather than customers. But I'm sure people guessed that already, I'll spare everyone.
EDIT - thinking about it, I guess if person A is gaining x+y by selling then the person B buying is parting with x+y at the same time, and the overall wealth in circulation is unchanged. The next time that share is traded, assuming its price has risen by z, the exchange is for x+y+z, but the actual total wealth actually in circulation still remains the same (person B picks up x+y+z, but person C PARTS WITH x+y+z at the same time, net sum zero. The only real increase is in the perceived value of the item, the share. And person B makes a profit of z. All a bit magical, really. Bit like house prices.
Posts: 9,739
By: Creaking Door - 1st April 2015 at 17:29 Permalink - Edited 1st January 1970 at 01:00
Tresco buy a pint of milk from a farmer; after the costs of transportation, storage, refrigeration, advertising, interest-repayments and other overheads they sell it to you making a small profit in the process...
...let's call that profit 'z'. All a bit magical or just normal retail practice?
Posts: 3,447
By: Beermat - 1st April 2015 at 17:49 Permalink - Edited 1st January 1970 at 01:00
No, that's not magical. That is indeed retail.
You buy a pint of milk. You do nothing, no transport, storage, refrigeration, advertising, interest repayments (ahem) or anything. You then sell the pint of milk for z more than you bought it for. You add no value to it, but because someone else thinks they can perform the very same trick with that very same pint of milk they will pay you z more than you paid.
Ok, not magic - but nice 'work'. NOT KNOCKING IT. No politics of jealousy. But what a system.. and not really analogous to retail. There is no 'consumer' at the end of the chain, just a chain.
Posts: 9,739
By: Creaking Door - 1st April 2015 at 21:41 Permalink - Edited 1st January 1970 at 01:00
Why isn't there a consumer? The buyer of the share is buying a part of the company; that is a real thing. It exists, it has value, you can buy it and sell it.
And shares go down as well as up! The profit (or loss!) comes from the individual or company that you are trading with, not the company that the share is a part of (although buying and selling of their shares will affect the value of the whole company).
Nice work if you can get it (and with online share dealing everybody can).....but risky too! :)
Posts: 3,447
By: Beermat - 1st April 2015 at 21:54 Permalink - Edited 1st January 1970 at 01:00
I guess I meant with a consumable item like a pint of milk, when it is consumed, it is gone. Not sure it's an important distinction!
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By: Creaking Door - 1st April 2015 at 23:34 Permalink - Edited 1st January 1970 at 01:00
No, not an important distinction. Lots of things are traded in the same way as shares...
...fine art, gold, agricultural land, antiques.....bits of old aeroplanes! ;)
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By: Moggy C - 2nd April 2015 at 08:25 Permalink - Edited 1st January 1970 at 01:00
There is much you can do to minimise that risk.
Remember share ownership is not largely just gambling on the company's value going up. You as a shareholder participate in the profits of the company via dividend payouts. Most people hold shares long term and get a steady, but not spectacular income from them via dividends. The actual shareprice is irrelevant unless you are buying or selling.
I have a small residual pension paying out a few hundred quid a month. I put that straight into my online share account, which is also an ISA, so I don't have to pay tax on it.
My holdings cover about twelve or fifteen companies from BP and Sainsbury at one end, and internet companies like BooHoo at the other.
I have seen the share price of all three of those named fall whilst I have been holding them, but I still get dividends when they are paid out. Conversely I have some real stars - Greggs, Greene King, Persimmon Builders which have zoomed up in price.
Overall I get a slightly better return than investing that money in a savings account. By selling the 'stars' I could show a healthy increase in my capital. If I sold the lot I think I'd still be comfortably ahead.
So spread your portfolio over a good number of companies, mix big solid businesses with small growing ones, don't invest money that you might need short-term - you don't want to be forced into selling in the middle of a stock market crash, that's when you need to be buying.
Moggy
Posts: 9,739
By: Creaking Door - 2nd April 2015 at 10:46 Permalink - Edited 1st January 1970 at 01:00
Yes, 'risky' was the wrong word! What I meant to convey was that there was no guarantee that the value of shares would always increase over time.
I think there is this widely held perception that share ownership is the privilege of the wealthy and that making money from share-dealing isn't 'real work' (if it is done professionally) and in fact 'shareholders' and those that trade shares are mere parasites who profit from the hard-work of decent working people!
The only dealings with shares that I've had personally was some that were part of an inheritance; as executor I quickly sold these but was surprised by the 'costs' associated even with doing this. From memory the selling fee was about 10% of the (modest) holding; if one was to make money from rapidly buying and selling shares on market fluctuations I assume you'd need a much larger holding to cover the costs of the fees?
Posts: 8,464
By: Bruce - 2nd April 2015 at 13:44 Permalink - Edited 1st January 1970 at 01:00
Fees are not that great, and certainly shouldn't be as high as you have quoted there.
Playing the stock market is little different to a flutter on the horses. Anyone can do it badly. To do it well, you need to spend time with the form books, know the trainers and the riders.
My father can do it well. My brother too.
I do it badly...
Bruce
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By: Moggy C - 2nd April 2015 at 15:29 Permalink - Edited 1st January 1970 at 01:00
A self-dealing account doesn't cost big money.
Mine works on a flat rate £12.50 per trade, regardless of the amount invested / disposed of.
Moggy
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By: Creaking Door - 2nd April 2015 at 15:52 Permalink - Edited 1st January 1970 at 01:00
If I remember correctly I think I paid £30 for a one-off transaction (sale) of about £360 worth of shares.