[bhupy]

You’re being downvoted, but hedge funds’ positive impact on price discovery is under-rated.

Matt Levine (Bloomberg’s extraordinary finance opinion writer / jokester) had a pretty good articulation of this in a recent post about GameStop and Melvin Capital (https://www.bloomberg.com/opinion/articles/2021-01-28/knowin...):

“The point of the stock market is to Enable Price Discovery or Encourage Capital Formation or something boring like that. Stock markets exist so that companies can raise money to fund their projects, and so that the smartest analysts of companies can work diligently and compete fiercely to put the proper value on those companies so that we as a society can know what projects are most valuable. Stock markets exist so that regular people can invest their savings in those companies, making everyone better off: Companies get funding to pursue socially beneficial projects; regular people get an ownership stake in economic growth. Or whatever.

This theory has some obvious flaws in its real-life application, but it’s a decent theory. It is, if not exactly true, true-ish; it describes the fundamental underpinnings of the market if not necessarily its everyday operation. It posits a social purpose for financial markets, beyond making funny memes on Reddit.

It is just the case, just inevitably the case, that if you are going to have financial markets that are optimized for those purposes—that are liquid and complete, that attract smart people, that are open to everyone—they are also going to have a certain amount of nonsense. It’s not like WallStreetBets invented financial nonsense! Financial-market nonsense is, like, 70% of what we talk about around here on a normal day. How many times have I written about hedge funds tricking each other using credit default swaps? Financial markets exist to foster price discovery and capital formation, but the way they do that is mostly by letting smart people mess with each other all day. WallStreetBets is a new class of smart people messing, quite effectively, with the old ones.”

[Ologn]

> Stock markets exist so that companies can raise money to fund their projects

The amount of money corporate America raises from initial and secondary offerings in the stock market is negligible relative to corporate bonds, lines of credit, bank loans etc. Companies don't raise money from the stock market in any real sense. It has been this way since World War II (and possibly before).

[pavlov]

That’s certainly true in absolute numbers, but there are certain subsections of the market where stock offerings remain a primary capital instrument. Biotechs will often do an IPO even 5-10 years before the product is ready to launch, and then do several secondaries along the way.

[sroussey]

Moderna, foe example. And I imagine a few companies going through SPACs today.

[fn_bb_sqr_pnts]

that only addresses one side of the story - banks/credit decision makers often use market capitalization as a factor in underwriting. The easiest example of how equity prices influence credit is NFLX - their 1st big debt raise was in 2015 (2b?) when NFLX's burned 700M in cash and was pledging to be cash flow negative for the next 3+ years. Also see all the converts that a lot of recent tech IPOs have started offering

edit: changed the unit from billions to millions.

[fulafel]

(quoting your quote) "Stock markets exist so that companies can raise money to fund their projects"

This is said a a lot but surely things like it just exist, and any purpouses we assign are stories. The majority of the effect on the world of the stock market seems to be what happens with existing stocks and not IPOs & share issues.

[perl4ever]

This is a popular thing to say, and it's something that people say a lot because they like to say it.

I don't know all the forms that companies file to issue stock in the US, but I think S-1 and S-8 are a couple of them. Lots of these are constantly filed with the SEC.

Yesterday, Monday, there were:

  40 S-1s (or amendments) which are registrations for issuing securities.
  23 S-8s (which I believe are registration of securities used to pay employees).
  11 F-1s (which are for foreign issuers of securities)
  12 S-6s (which are for unit trusts issuing securities)

At this rate, say there are 260 business days in a year, 86 x 260 = 22,360. I vaguely think that the total number of public companies in the US is like a quarter of that, so issuing stock appears to be a pretty common thing.

[fulafel]

I think getting into the numbers is the right idea. I wouldn't know where to look for the $$ volumes of issues/IPOS vs eg dividends or stock trades, if someone does please chime in :)

My gut feeling is that despite being common, issuing stock is still peanuts compared to the old stock trades/dividends.

[perl4ever]

I don't think the numerical comparison you want to make has any meaning at all, let alone something to do with the relative importance of the activities of trading vs. issuing stock.

The ratio of stock traded to stock issued can be anything from zero to infinity.

We could imagine having "high frequency trading" of car loans producing a huge volume and it wouldn't change the fact that the car loans exist because people need transportation.

[robjan]

The existence of a secondary market with lots of liquidity gives people the confidence to invest in IPOs. There would be a lot fewer participants if there was no secondary market.

[bhupy]

In the same post I linked, Matt Levine actually provided an example of exactly that happening to another similarly over-hyped company, AMC:

“In talking about GameStop, I have occasionally tried to tie the goofy stock-price dynamics to corporate finance. I suggested that maybe GameStop could sell stock at these absurd prices and use the money to, you know, be a better company. It’s tricky, selling stock at these prices, but in theory that’s what the prices are for: People are telling you that they want to buy your stock to fund your projects, so you might as well sell them the stock and do the projects.

AMC has done that! On Monday it announced that it had raised $506 million of equity (and another $411 million of debt) in various transactions that “should allow the company to make it through this dark coronavirus-impacted winter.” Good work. Even better, that same day AMC launched an at-the-market offering to sell up to 50 million shares into the market at prevailing prices, allowing it to sell opportunistically to any redditors who wanted to buy. Yesterday it announced that it had finished the offering and raised $304.8 million from that and a previous stock sale, at an average price of about $4.80 a share. Of course yesterday the stock closed at $19.90, so AMC would have done better to wait a day, but nobody’s perfect. When redditors are clamoring to buy your stock you should sell it to them before it’s too late; there’s no reason for the company to try to time the endgame perfectly.

Also yesterday holders of $600 million of AMC convertible bonds converted them into stock at a conversion price of $13.51 per share. Six hundred million dollars of debt, vaporized by Reddit enthusiasm. “In the absence of significant increases in attendance from current levels, there is substantial doubt about our ability to continue as a going concern for a reasonable period of time,” AMC warned investors on Monday; four days and a billion dollars later, there is somewhat less doubt. A week ago it was not crazy to think this company was doomed; now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week. Capital formation!”

[sroussey]

AMC had previous filed to make those sales, btw, before the Reddit push. Wonderful timing.

GMC had not, and was in a quiet period. Not so great timing.