Faith and the Stock Market

The unique way that faith is involved in the markets

Putting your faith in the stock market.

If you want to understand what the stock market is all about, first you have to understand the underlying instrument that the whole system is based upon.  That would be a share of stock.

What exactly is a share of stock?  

Back in the good old days, a share of stock was a physical certificate that gave you partial ownership in a company. Nowadays it is a bit of data on a computer server, but it still gives you ownership of the underlying company.

Kinda.

One share of stock is the smallest slice of ownership you can have in a company, and unless you have millions of shares, your actual ownership is for all intents and purposes negligible. Sure, it gives you the right to vote in shareholder actions and proxies, but once again, without a significant stake, your ability to actually affect the management of a company is zero.

So why do you buy a stock in the first place?

Despite the ownership aspect of a share of stock, it is not like you can go up to the company and ask for a share of the profits or money in exchange (though some might consider the dividend from a paying stock profit).  

Try this.  Next time you are in Cupertino, Ca, mosey up to the Apple campus and ask them to give you some cash for you shares.  But, make sure to tell security you were just joking before they forcibly eject you.  

No, the only place you can get money for that share is in the open market, the stock market that is.

You buy a share of stock today in the hopes that tomorrow, or sometime in the future, it will be worth more money than it is now. Or in the case of shorting, that it is worth less.

This is where the faith part comes in.

To better illustrate the point, let's use the US Dollar.  One US dollar is just a piece of paper, one that you used to be able to redeem for gold at the Federal Reserve (in theory).

 But when Nixon took the country off the gold standard in 1971, there was no objective way to value our currency.  You had to have "faith" that it would be worth as much tomorrow as it was today.

History is full of examples when that did not take place, most notably the hyper-inflation of Germany's Weimer Republic, where one Mark in 1922 equaled 320 US Dollars and six months later was equal to 4,210,500,000,000 USD.

A share of stock has similar mechanics. You have to have faith that it will be worth something in the future.  That there will be a liquid market in which to sell it at a fair price. There are no guarantees.  

Of course some stocks have a better chance of holding onto their value (or appreciating) than others do.  It is not uncommon for hot bio-tech stocks to become almost worthless overnight, something that probably is not going to happen to Apple's shares.

But it is important to understand that whole of the stock market, the actual mechanics, depend on its participants believing in the value of shares, and that is ultimately an act of faith.

Photo Credit: Martin Barraud/OJO Images/Getty Images