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Author: The Sage,

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October 11, 2013

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The coming to being of The Central Banker, like the automobile, gave rise to a dirty smoke, called Inflation; which is the by product of a remarkable invention - Paper money! The central banker with the power to create money as needed would not take too long before he caused to much money to be in circulation. The price of limited resources tend to move higher as people increased their money. They would spend more and compete for limited goods. With this new money the economy that engenders it would grow rapidly and give creative energies to the company.

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The company would give birth to the stock and bond. Additionally, money would continue its evolution. Stocks and Bonds are considered assets. We often place our assets as collateral in exchange for money or some monetary value. In essence it is money and is exchanged for money. However it has many advantages because it is tied to the company. The company pools a group of often talented people together with skills that drive the company to succeed in its venture. With this success, the company is rewarded with higher share prices; since others would desire to partake in the company’s success and the success of the group of talented people. The company which is given its own legal identity protects the original investors over a long period of time. Even if they die the company exist to pay its debts or continue paying dividends or continues its rise in the share price. The original investors can only lose the amount they invested but with the success of the company the sky’s the limit. Money/wealth can be created by and because of the company and passed on to their heirs for as long as the company exists. The products, services, and talent of the group, the company, being the driver of this wealth. The company is benefited by tax policy and the ability to obtain large amounts of Credit with long repayment schedules, that it can deploy as investments which if used properly yields, like farming, a crop of - profits. This profit is usually at some juncture passed on to the shareholder.

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The company’s fortune would be of little value if there were not a market for its assets. therefore with its creations came the Stock Market. At first only a small group of men in association would gather and trade on information they had. In 1639 shipping was the industry of the day and shipping companies voyaged for many months at a time. Imagine if credit was garnered; 5 ships procured to undertake spice trade from India. However, one ship sunk at sea. The value or original profits would require recalculation, with only four ship bringing cargo. The men in association would use what knowledge they had to trade on their math, as to what profits might now be. In like manner, a field of study exist today for just such a purpose. We call them and me Stock Analyst, others are called Financial Analysts.

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The lesson to be had is, tremendous value lies in the company but like any two human beings, not all companies are equal. Seeking value in the company you keep or choose to own is a primary goal of a group of investors called value investors. A contrasting group of investors are called growth investors. Both enjoy the ability to make money hand over fist by utilizing the wealth creation capability of the company. Individuals can invest in the companies stocks and or bonds. Stockholders tend to bear the risk inherent with the company’s ventures while bondholder take less risk and receive steady, more secure payments that tend to be lower than stock returns, as they bear lower risks.

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In the passing of time another innovation was created the stock option. This allows an individual to buy the right but not the obligation to purchase say 1000 shares, at say, $200 per share of Google’s stock but not the obligation to do so. The cost associated with doing this might be 20%. Therefore for 20% of the cost of the position you can own the right to that position. Another way to say this is for the cost of 200 shares you can purchase the right to buy 1000 shares. There are limits of time and prices that these stock options or contracts can be purchased forl. the Limit of the contract would be its expiration. Options can expire in a month, three months, six months, a year or multiple years. The longer the time period the higher the cost tends to be. An individual therefore can invest in the company’s stock, bonds stock options or a combination of these. Stock options can and are used to hedge, protect or insure against declining markets or decline in the stock price. Finally, there is tremendous money/wealth creation value in the company.

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The Sage

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