The most recent post in December's Stupid Questions article is from the 11th.
I suppose as the article's been pushed further down the list of new articles, it's had less exposure, so here's another one for the rest of December.
Plus I have a few questions, so I'll get it kicked off.
It was said in the last one, and it's good advice, I think:
This thread is for asking any questions that might seem obvious, tangential, silly or what-have-you. Don't be shy, everyone has holes in their knowledge, though the fewer and the smaller we can make them, the better.
Please be respectful of other people's admitting ignorance and don't mock them for it, as they're doing a noble thing.
People in finance tend to believe (reasonably I think) that the stock market trends upward. I believe they mean it trends upward even after you account for the value of the risk you take on by buying stock in a company (i.e. being in the stock market is not just selling insurance). So how does this mesh with the general belief that the market is at least pretty efficient. Why are we systematically underestimating future returns of companies?
It isn't just risk that explains why you might not be willing to pay more than $1 for a share that you expect to be worth $1.10 in a year's time.
First of all (rather trivially, and I am not suggesting you've overlooked it) there is inflation. That $1.10 next year is denominated in dollars that will be less valuable than today's dollar. (Assuming positive inflation rates, which is the usual situation.)
Second, there is opportunity cost. While your money is invested in the company you bought shares in, it isn't available for you to spend on other things. Henc... (read more)