What's the point of the stock market?

Apparently shares are pointless.

Now I can see engagement bait from a mile off, and this is definitely an example of it.

But I reckon it’s important to understand exactly why the stock market is the most beautiful creation since the engine.

The engine came after the stock market but whatever.

I mean, it certainly is a bold as f*ck claim, and he’s definitely getting killed for it.

But this does ask a good question — why does the stock market even exist?

It’s pretty simple if you understand incentives!

See, the market is the all seeing eye when it comes to value, and price is dictated by buyers and sellers.

If something is undervalued, buyers will step in.

Overvalued, and buyers will step out and sellers come in.

When a firm is able to IPO, it means it’s at the stage where the founders and shareholders believe they can realise value for their hard work, and sell some shares to the market (listing on NYSE and NASDAQ runs at about $350-$500k for application and listing fees, whilst lawyer fees etc can run at a percentage of that on top, meaning the company has to be at a healthy stage!).

Here’s that process detailed…

1. Preparation:The company ensures it meets the requirements for an IPO (e.g., financial stability, growth potential, and corporate governance).The company selects an investment bank to manage the IPO process (the lead underwriter).
2. Due Diligence:The underwriter conducts due diligence on the company's financials, operations, and management.The company and underwriter work together to determine the initial price range for the stock and the number of shares to be offered.
3. Registration:The company files a registration statement (Form S-1) with the Securities and Exchange Commission (SEC), which includes a prospectus detailing the offering terms and the company's financial information.The SEC reviews the registration statement and provides feedback.
4. Marketing:The company and underwriter market the offering to potential investors through a ‘road show.’The underwriter builds a book of interested investors and collects indications of interest.
5. Pricing:Based on investor demand, the company and underwriter set a final offering price.The underwriter allocates shares to investors.
6. Listing:The company's shares begin trading on a stock exchange.The underwriter may provide price stabilisation in the aftermarket by market making the shares.

There is a blackout period where insiders can’t sell shares of usually 90-180 days to prevent just mass selling of shares and messing up the supply on the book…

But after that, insiders are free to then go and sell — the market might not take TOO kindly to that so something they might do instead is borrow against their shares.

Rich people have all sorts of tricks to ensure they retain their assets rather than liquidating for cash.

But there is something known as a direct listing too, where you go straight onto the exchange and shares are offered without any initial bids put in by institutional investors.

This means the launch price is effectively the price the market is paying as a reference price once the exchange has received all buy and sell orders from brokers.

It’s probably some form of weighted average price.

BUT, this means the founders can sell right away — it’s what Spotify did — and means they can ignore paying lots of fees to bookrunners and underwriters.

It does mean, however, ultimate value might not be realised since the support for the stock is not backed by the initial subscriptions from institutional investors.

But at the end of the day, listing shares on an exchange is about incentives.

If the company does well, those holding shares internally (and they tend to hold the shares in the highest amounts) will be rewarded MASSIVELY.

This tweet is engagement bait, but the idea is not false.

Divide the total amount maybe by 5-10 and that’s a truer depiction, but walking away with $10-$20m is arguably not a bad trade just for working!

?

ICYMI: What we spoke about last week

We kicked off the week by explaining why timing the market is a GOOD thing that you should strive to be doing, while bond volatility becomes all the rage as the Bank of Japan looks to alter monetary policy tonight, and even ended the week with MORE on Japan.

But the KILLER article from this week was this one — why it pays to be long innovation, and a few sectors to take a look at over the next 5 years that could be the next Nvidia.

To read all this, join Fink now, for only ￡6.99 per month.

?

What you need to know

Boring you to death with this, but tonight is the night the Bank of Japan likely exits negative interest rates.

Why is it important? Well, it’s a signal of global tightening and a central bank moving from negative rates to at least 0 is BIG.

Here’s what the banks are saying (NIRP = negative interest rate policy, YCC = yield curve control)…

I’m leaning on Goldman and Bank of America being right…

?

The most important chart

If you ever feel bad about not being great at picking a target on a stock, then don’t.

Here’s how bad Deustche Bank analysts are at picking price targets on Tesla over the last few years…

?

PS. We’re still running lifetime subscriptions where you can get all the premium stuff forever AND Discord access.

Click to get it with discount, it’s usually ￡700.