A correspondent on Usenet took umbrage recently when I referred to traders as (possibly necessary) parasites on the economic system. That he used to be one probably had something to do with his outrage, but I meant the term in the biological sense, in that traders generate no wealth, nor provide any real service, at least in my simplistic understanding.
Perhaps the illuminati here can shed light on my misunderstanding by considering the following simple scenario:
1. MomandPopCo decide to expand, and so release an IPO of 2,001 shares. They keep 1001 to have majority control, and sell the rest for $100 per share. With a 1% fee charged by the brokers, they realize $99,000, and the latter get $1,000
2. A short time later, Amy sells her 100 shares for $105 per share to Bob. She gets $395 in profit, and the brokers get $105 for their service.
1. Where does all of the money come from?
2. Why does Bob pay more for the shares than Amy did?
3. Why was Amy able to charge more than she paid?
The answers are clearly(?):
1. From the investors.
2. Unless Bob is an idiot, he assumes that the stock price will either further increase, or the dividends will cover his costs.
3. Amy must be taking the discounted value of the future dividends of the company, or we are starting yet another bubble. This is easier to see if the company is buying and raising cows for sale, being a transaction of finite duration.
Notice that the company does not benefit at all from the second transaction. Even if their stock goes up, they cannot sell any more without losing control.