Speculation and Income Inequality

  • The biggest cause of the stock market crash was speculation.
  • It is unacceptable that the daily abrupt not well-founded ups and downs can scare away investors from buying stocks.
  • The new situation in the 21st century requires a new approach to the distribution of income.

Speculation is the making of money out of the manipulation of prices, instead of supplying goods and services. It brings economic bubbles. Economic bubbles occur when the prices of assets exceed their intrinsic value by a considerable margin. A speculative bubble is essentially a social epidemic.

Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuation in the market. Speculation increases the price of goods that people need, for their benefits. It is a bad idea.

The author, Michael Zilbering.

The biggest cause of the stock market crash was speculation. As prices began to rise for stocks, more investors wanted to buy to make sure they did not “miss out” on great investment. This meant that, as the stock prices started rising more people were demanding more stock, which caused the price to rise even more.

Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile. Speculation is not good for the economy, it’s actually really bad. It has completely distorted our economy by diverting money and investment away from productive enterprise and business and into unproductive asset.

A price is the compensation given by one party to another in return for one unit of goods or services. A price is influenced by both production cost and demand for the product. A price may be determined by monopolist or may be imposed on the firm by market conditions.

A share price is a price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In layman ‘s terms the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. The stock’s price only tells you a company’s current value or its market value. The trading on stock exchange is done on the market value prices, which depends on speculators.

Above-mentioned description of the present order clearly highlights that the way stock prices are set on the market by speculators have negative influence on the whole economy and individuals’ investments.

That’s why I wanted to convince the readers about all shortcomings in the present market economics in connection with this. It is like a casino, which satisfy most of all requirements of the speculators, then investors.

If we want to affirm that the stock market is a form of investment, we should declare that stocks are not goods, but a share of actual cost of a corporation with the calculation of profit(losses) on a definite period, which should serve as a basis for exchange in the market.

This will bring a whole change in the market economy:

  • All citizens will become investors;
  • No more bubbles in the marked;
  • No more diverting money and investment away from productive enterprise and business;
  • Eliminates income inequality;
  • Eliminates economic crisis;
  • Regulates well social problems;
  • Reflects correctly the index of wealth growth.

By investing their savings and pension funds in stocks, working people expect to get a share of corporate profits in addition to their earnings. It is reasonable that such profits go hand in hand with some risk of failure within a few companies. Besides, they help corporations fulfill their needs for a constant increase of production.

These stock prices need to reflect the results of the public companies’ activities and fluctuate within the boundaries of collected profit(losses) for every stock. As a result, the price of a stock becomes a derivative of fluctuating profits. Over a long term, stock prices rise in line with earnings per share. The profit(losses) of companies reflect a complete and final result of their activities, taking into consideration the quantity and quality of production, its sales, productivity, cost price and other economic, political and social changes for a corresponding period.

Therefore, it is unacceptable that the daily abrupt not well-founded ups and downs can scare away investors from buying stocks. Stocks are not goods, but valuable papers, which reflect the accumulation of profits on a definite date. The price of a stock should be established by the public companies by means of book-keeping calculations, by adding the profit of a given quarter divided by the amounts of shares, to the price of the stock from the time when the stock was issued, i.e. initially public offering. Thus, not the stock market, but the public corporations set the price of their stock, and bear the responsibility of their substantiation. One would think that such organization of the stock exchange satisfies the requirements of capital investment. In reality, the stock market operates on an order established 200 years ago, I.e. the price of a stock is what somebody is ready to pay for it. This way the traders(speculators) enrich themselves on the stock market on the account of volatile movements of stock prices. They make money when the prices go up and down, by means of increased frequency of buys and sells. The investment business is a giant scam; it deletes billions of dollars every year in transaction cost. They artificially violate the balance of supply and demand (that doesn’t apply to stocks), so they can make every day billions of dollars, enriching themselves on the backbone of ordinary investors. For the average investor this is certainly a scam. They know that big investors manipulate the market.

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If we want to affirm that the stock market is a form of investment, we should declare that stocks are not goods, but a share of actual cost of a corporation with the calculation of profit(losses) on a definite period, which should serve as a basis for exchange in the market.

Market forces can accomplish wonderful things, they can ensure a distribution of income, that enables all citizen to meet basic economic needs. To pretend that nothing changed from the time of the start of capitalism – is to put a brave face on a sorry business.

The CEOs of corporations, which are the same employees like all others, take away a big share of corporate profits (about 30-50 million as premiums and bonuses) and for all that they don’t risk at all with their capital. This is frankly spoken a robbery of the company, the workers and shareholders. This has to come to an end.

The new situation in the 21st century requires a new approach to the distribution of income. Under the new existing condition, it is necessary to establish new norms promoting the implementation of necessary economical requirements of all levels of the population. Wages should be coordinated with the results of productivity of labor and inflation. It is necessary to establish an order of distribution of profits by public corporations.

The concrete definition of a correlated percentage should be worked out by a scientific-research institute. However, it seemed to us, that it is advisable to distribute profits exemplary, in the following way:

  • for scientific research and development – 50%
  • for financial incentives of members of corporations – 25%
  • dividends for stock shareholders – 25%

The collectives of company’s workers should get awarded for yearly results. The premiums end bonuses for CEOs, CFOs and other leading personnel can be of any reasonable dimension, but should be coordinated with the final results of corporations, not for a year, but for a five-year period.

In addition, it is unreasonable to expect a fair distribution of income among the population until the deceptive practice of market price determination is in hands of speculators. The stabilization of prices together with recommended distribution of profits referring to our affirmation is equivalent to establishing justice in income distribution, which equivalents to establishing a new phase of capitalism where all levels of the population makes use of the advantage of the capitalistic and democratic systems, smoothing over contradiction in the distribution of income.

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