Ask HN: What's the purpose of investors and the stock market?

[tjr226]

What with Marissa Meyer getting Yahoo's CEO post, and FB's stock dropping like a stone, I've been seeing plenty of half-formed blog posts about the troubled relationships between tech companies and investors. As a person who's new to tech, it's hard to figure out what you guys traditionally think about "the markets."

So HN, what do you think the purpose of investors actually is?

[clarky07]

In general the purpose of the markets is to provide capital to businesses that need lots of money to get started or do something new. As far as what the markets mean to Facebook or yahoo at this point, who knows. They aren't likely to really need additional funding at this point. The markets are just the place where their stocks trade, and it decides how much money the CEO has and makes (by virtue of the price of the stock).

[lutusp]

> So HN, what do you think the purpose of investors actually is?

Operating capital. Investors, either private or public, provide funding for company operations in exchange for the right to profit from those operations.

The fact that stocks rise and fall is perfectly natural -- it reflects public perception of the value of a company. Economic theorists who think deeply about this stuff, think it's possible that markets are often close to perfectly efficient, meaning the money naturally flows to the place where it does the most good -- meaning maximum profit.

There are a number of possible distortions in the market. One of them is "insider trading", where business insiders exchange privileged information and make trades on that basis -- information the public doesn't have. Insider trading cheats the average investor, therefore it's illegal.

In general, equities markets are fair, meaning everyone has the same chance to succeed. And the fact that stocks plummet from time to time is a market fact of life -- sometimes it reflects public perception that a company is overvalued, or that another company is a better investment.

Equities aren't that difficult to understand. And they're one of the better long-term investments.