is the stock market unethical?

February 14th, 2007

We've all seen loan sharks in movies, and they aren't very attractive characters. What they do is not unlike stock brokers. They first give you some money, but then they want it back on time, with interest. This one-to-one relationship makes the deal very transparent. The stock market is more complex, but it's essentially the same thing: the only way you can profit is from someone's loss.

Let's say you're a successful investor in the stock market. What does that actually mean? It means that someone created a company, worked hard to sustain it, then decided to go public with it to be able to expand it, and thus sold shares in the company. What you've done is bought those shares cheap and sold them to suckers at a much higher price. Thus you profit.

So you make money by investing money, but what does that actually mean? You haven't created anything, haven't created any wealth. Haven't performed any service. Haven't delivered a product of any kind. You've essentially done nothing. You solely profit at someone else's loss. So the stock market is like a lottery, only with good odds. Most lose, some win.

Of course, you could say that as long as people go into the market willingly, and abide by the rules of the game, it's fair that one person wins what another loses. Still, is the profit anything to be proud of?

Norway has a lot of income from selling oil and the government decided at some point that it would be wise to collect some of these profits to set aside for the future. It's called the Oil Fund. But they haven't sat on the money idly, they decided to invest it, mostly in bonds. Now, ironic as it is, considering Norway's reputation that it's the oil reserves that have made the country wealthy, the government now actually profits more from trading bonds than it does from oil mining. Here's a whole country whose welfare is based in part on trading bonds, buying cheap, selling expensive.

There's nothing very odd about this, it's the times we live in. But how could this possibly be moral? One government directly benefiting from the losses of others?

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16 Responses to "is the stock market unethical?"

  1. erik says:

    "You solely profit at someone else’s loss."

    I don't get that part. At the stock market, you profit from someone else's *profit*. Your stocks only gain value if the company is doing well. You're basically hitching a ride.

    As for the part about morals, history forces me to resent that since the world's very first stock market was a product of Dutch society :D

  2. numerodix says:

    Let's scale it down to the simplest example.

    A is a company on the stock market.

    B is a good investor.

    C is a bad investor.

    Okay so rumor has it that A will merge with IBM. This would cause A's stock to rise. B invests €1k in A stock. The merger goes through, the stock value soars. At this point C wants to get in the game. B's stock is now worth €1.5k, which B sells to C. The stock keeps on rising as A/IBM announces big plans for their shared operation. A week later news breaks that A (let's call them Microsoft) will be persecuted for monopolistic practices, which could seriously endanger the whole company. The stock plummets. Things are looking really bad for A without any light in the tunnel. Meanwhile C's assets are tied up in A stock, C has no money to invest in other ventures. To free those assets (and maybe save what's left in case of A's bankruptcy), C sells the stock at €1k.

    B: €0.5k profit
    C: €0.5k loss

    That is, B's profit is conditional upon C buying the stock. Otherwise the proud share owner can watch his stock rise, but has no way to cash in if there's no buyer. Hence no profit for B without a loss for C. Money isn't created, it changes hands.

  3. erik says:

    That all pretty much depends on the idea you have to cash in if you want to make money on your stocks, that's not true. Stocks can serve as guarantee if you want to get a loan at a bank and there are other, similar, uses for them.

    In case of bankrupcy, stockholders (as owners of the company without baring the responsibilities) are financially compensated through the selling of property and assets which are then divided among the stockholders.

    There's a lot of legal loopholes. It's more trade than gambling.

  4. numerodix says:

    But this "financial compensation" surely is some low fee. I mean if the stock price was 500 at its peak and it's now 2, even if the company goes bankrupt, then your compensation as a stockholder isn't exactly much to write home about, is it?

    But that aside, do you think it's "moral"?

  5. erik says:

    Compensation is usually quite reasonable from what I hear... Not that I'm an expert.

    But what's not moral about it? It's trade. Nobody is forcing you to buy stock.

  6. numerodix says:

    Like I said, if you're a trader, what exactly is it that you do? You don't create anything, you just buy and sell. So your income is based on people's willingness to take a hit.

    If your kid asked you "dad, in your job, what is it that you've done?" and you say "well I've made a lot of money, so I could buy this house and take care of you and mom" and the kid would say "no, I mean what have you done specifically, what have you created? what wouldn't exist if you hadn't done it?" what would you say? :D

    The idea of work is that you trade one form of wealth for another, but if you're just an intermediary between the producer and the consumer, what is it that makes you valuable? You're just a redundant link in the chain.

  7. erik says:

    No, stockholders provide the company with funds by purchasing stocks and becoming part-owner of the company. The company can use those funds for investments without asking for periodical paybacks and interest rates like banks would do. In that sense the stockmarket is a great alternative for a company to create some additional funds and make some money off of their own stocks on the long term (often stocks are sold via the company rather than from stockholder to stockholder).

    So I would tell my kid I helped Example Company Ltd grow into a successful organisation ;)

    It's pure trade, very clever and very capitalistic. It might be because I'm Dutch: but the idea of wealth earned through hard work somehow being more noble strikes me as very simplistic and outdated.

  8. numerodix says:

    Alright, fair enough :)

    But stop giving out my email address, you crook! :mad:

  9. erik says:

    But it's handy :D

  10. Jack says:

    Telia is the phone company that owns all the networks (regular phones, mobiles, internet, etc. ) in Sweden. They were owned by the state and a few years back they became private. When they made the switch, they released stocks in the market and people rushed and bought and bought and bought. What happens the next day? Down, down, down the values of the stocks drastically dropped. Now who gained in this formula? Definitely the company, they don't care about the face value of the stock, it is there just to manipulate people to buy and sell.

    Telia is still a money sucking company where all mobile operators, all earth phone companies and all internet providers charge the consumer an unseen fee because they have to pay Telia for the use of their networks.

  11. numerodix says:

    Yeah, that's what they mean when they say "deregulate" the market. Telenor used to be a state owned company, then they were privatized. In a strange twist, they too still own all the copper wire, so all the other providers have to pay them a fee for the privilege.

    Ironically, Telenor is constantly struggling financially, while other providers offer lower rates and higher connection speeds.

  12. ash says:

    Some of the reasons I don't want to work in the City of London are ones you mention - you're pretty much making money from money. For me there's no job satisfaction in that. But I don't think it's immoral - nobody forces anyone to buy stock. No forces anyone to gamble. I might not like gambling either, but on the other hand as an idiot tax it has no peer :)

    Some of your reasoning sounds like you have a problem with a lot of things that make up capitalism. There are many links in the chain between the producer and the consumer these days.

  13. Kelly says:

    I completely agree with you. I have been thinking about this for a long time and independently came to the same conclusion. Erik's comment is partially right: when a company first goes public, investors are providing the needed capital to the company and it could be argued that those investors are then ethically entitled to share in the company's resulting profits*. But your main point about someone's gain being someone's loss is correct from here on out. After the initial sale of shares, stock trading doesn't provide any new investments to the company or benefit it. It's simply gambling on whether the stock with go up or down. If you make money, someone else is losing money. If you sell high, that's good for you, but you can't sell high unless someone buys high, and that's bad for them. It doesn't help the economy; it doesn't produce any kind of good or service. If I grow bananas and sell them to you, that is ethical because I did work to produce something of value to you. If anything, stock trading hurts the real economy (consisting of goods and services people want or need) by diverting labor and resources into something that doesn't produce anything beneficial.

    *To me, anything where you make money as a result of having money but not doing work is unethical because you're not producing anything of value. In the banana example, I would find it morally questionable for a plantation owner to make money fully off the labor of others (hire someone to manage everything and hire/fire/oversee the workers who actually grow the bananas). Some compensation may be warranted, but our economic system disproportionately rewards capital owners compared to laborers, and that's not ethical.

  14. Subramani says:

    I read your blog in Oct 2009. I agree with your views. I feel anguished when I see thousands of brilliant educated young people speculating in stock market with the hope of making quick money. Some get it right and make 'profits' and others lose their investment. A stock that trades many times the net worth of a company is nothing but gambling. Brokers are employed by companies to manipulate the sentiment and ramp up the price of the stock to unreasonable levels. They selectively leak news about company's 'growth plans' and corner the available stocks to create artificial scarcity thus leading to increase in the stock price. Buying stock of a company at true value (Net asset value) of a particular company is not bad but, when it becomes a commodity for speculation, it becomes gambling and leads to idle money. Stock exchanges must declare the net asset value of companies periodically so that investors can buy stocks at true price. This is already being done in the case of Mutual Funds where the NAV is published on a daily basis and investors buy only at NAV price.

  15. JohnC says:

    People, greed should not be rewarded, ya? If someone came in to buy at the top of a mania b/c of greed, should they be rewarded? The same can be said of fear...

  16. Mike says:

    A lawyer benefits from someone elses loss. Even a decent paid minister benefits from someone's loss, (or being lost). A supermarket owner benefits from someone's loss because the someones aren't fortunate enough to be able to produce the goods themselves. A barber benefits from someone's loss because the person hasn't found a way to keep their hair from growing. A wealthier man lures away a beautiful woman from a man with lesser economic stature, even though the less wealthier chap was a better match and would make a more loving, supportive husband.
    So what's the error in someone benefitting from another's loss when it goes on all the time. 100,000 flies can't be wrong.