Understanding Stock Market
[Don Strickland] shares a useful link QUOTE "WorldCom scandal's deep roots", by Jonathan Krim, THE WASHINGTON POST [Don Strickland] UNQUOTE and he also has links to [unpleasant story] from [diJEST: a journal of extrapreneurial strategy and technology] about where the market for jobs for computer people is going.
I watched [Suze on CNBC] as she explained something about the [Stock Market Scandals] that I think a lot of people can be confused about, and I think her explanations were great. The person, who called, said that he was not asking about some financial challenge he was facing, but a need to better understand something about the Stock Market.
It seems clear to all of us that the financial health of a company has an impact on how its stock goes up and down in the market, but what impact does the value of the stock going up and down have on the financial health of a company? That is a great question, and [Suze on CNBC] gave a great answer. I have expanded on her answers quite a bit in sharing my revised understanding, so it is possible I have said stuff that she would never agree with.
When a corporation goes public with its shares being traded on the stock market, those shares of ownership in itself that are released, is part of the value of the company, called capitalization. As the value of the stocks go up, the value of the company goes up. As the stocks go down in value, so does the value of the whole corporation. Now this value gives the company power in the capital markets when it comes to getting good financing.
We can make a parallel for understanding this by looking at our ordinary lives. Our credit rating has an impact on what kind of loan we can get from a bank.
- What is our credit rating like?
- If it is very bad, we end up paying like 10% interest and have to sign over our automobile or other assets as collateral for the loan, such that if we cannot pay off the loan, the bank gets to keep our personal automobile - it is theirs now, and they will sell it for whatever they can get, subtract that from the debt, and we still owe the difference.
- If we have a pretty good credit rating, we pay like 5% interest and do not have to sign over ownership of something to risk losing.
- A large enough loan, and that difference in percentage that we have to pay, over how many years of the loan, that can be a pile of change.
- If we have a fantastic super excellent credit rating, the bank might give us a loan in which there is no interest, and we not have to put up any collateral, because the bank wants our business in other areas.
This explanation of our credit rating mentioned our FICO score which I want to review further later. It has to do with how well we pay our bills, what debt we are carrying, and other stuff. How do we find out what our FICO score is? How do we find out what the ingredients are into that score? How do we check to see what impact there is on it by our efforts to improve our credit situation? In times past I was not too concerned about this, because a person with a good credit rating is inundated with people trying to sell me something, and I figured that one way to turn off the junk advertising was to let my credit rating slip a bit. Then when I do need a low interest loan, I will crank up my credit rating a few months in advance of that, but I would like to know how long before I apply for a loan that it is a good idea to start cranking it up again.
Well this credit rating that we mere mortals can have, that influences how we are treated by banks, this is also a reality for big business whose shares are traded on the stock market, and one of the factors in the scoring by banks as to whether or not they are a good credit risk is the value of their stock. So as their stock price goes down, the banks financing interest rates go up, and vica versa, so the stock price does affect the company's capitalization, if they are borrowing money from banks.
But there is another impact, that of employee morale. In many public corporations, employees, from the top executives on down, own stock in the company they work for. Martha Stewart's downfall began thanks to the timing of her selling 4,000 shares out of the 36 million shares she has in her own company. The problem with the timing is explained by [Stock Market Scandals]. At that time, each of her 36 million shares were worth about $20.00 each. Now they are worth $7 to 10 each, so her net worth has dropped to 1/3 to 1/2 of what it was, and it is still dropping.
I have stock in Intel, Microsoft, IBM, and other companies that I had thought were almost blue chip. My rationale in selection of tech stocks was that I was looking for the building blocks of the infrastructure: Operating Systems; Modems; Servers; the Chips that are the basis of the hardware; so that no matter which hardware or software companies won out or lost in the big competition, I would be invested in the building blocks the winners used to make their products, or float them down the information superhighway.
My total holdings were worth $50,000.00 a year ago, I have not purchased or sold any stock for over a year. My total stock market holdings are now worth $25,000.00 and continue to slide down. This has an emotional impact on everyone who is affected by stuff like this. My sister's husband is an unemployed stock broker, and I was reminded from that source that a lot of money in the stock market is like play money, we have to diversify.
At what point does it make sense to buy more stock at these bargain prices? No one can tell when it has really bottomed out, whether a rally is just a blip on the downward spiral.
No one knows where the economy is going to go, except some manipulators of the [Stock Market Scandals] until they got caught. When Bin Laden does his next major attack, and gets away with it, the stock market will go down some more. But the War on Terrorism will not be forever. It could be for the rest of my lifetime through retirement. The Cold War was almost 50 years long and we still are reaping the damage from it. In history there are things like the Hundred Years War. I am confident that America is going to win this one, but I will not be surprised if it takes 20-30 years. Perhaps we should be focused more on what it takes to win sooner, and less on our own personal financial misfortunes.
So you have these employees who are hurting because their company stock value has been crippled, plus the cost of running the business is climbing because of the bank interest going up, and all the stuff they have to do because of the investigations. File extra reports to the government, all those lawyer fees. Customer confidence dropping, business moving to the competition.
So the answer to the question is that the stock market prices do have an impact on a company and its employees and stock holders, and in deriving this answer, we got a bit of an educational review of reality.
11:14:28 PM 
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