Shares (Stock) versus Money

 On another post I proposed that Money (Fiat Money, that is) is the Ghost of Wealth. I proposed that we depend on social agreement and cooperation to trade Fiat Money for anything intrinsically valuable, while Wealth is anything that is intrinsically useful and valuable by itself.

At 12 noon on a Tuesday in a busy city, I should not have much trouble going through the process of converting part of my bank balance into a decent lunch. Marooned and hungry on a deserted island, my bank balance is totally irrelevant.

Strolling around in any European city, a 100 Euros note would be much more useful than a 1 Euro note. Marooned on a deserted island, both notes would be equally useful (or useless). The nominal value (fiat money) is totally irrelevant.

So while any savage or barbarian would have no trouble identifying wealth as something useful and tangible, fiat money is but an immaterial, ethereal concept that requires years of training and indoctrination before it can be harnessed to lubricate the workings of society.

But for modern, well trained and indoctrinated humans, there is yet another level of abstracted wealth in wide use: Corporate shares. And while the  unwashed masses at large use fiat money on a daily basis, corporate shares are the prized possessions of a select economic minority.

And for the newcomer determined to join the sophisticated economic elite, the first hurdle will be to convert some fiat money into corporate shares. And to do that, the newcomer will need the services of a specialist: the stockbroker. And the newcomer will have to pay for the service, for the stockbroker will demand a commission to perform his magic.

So it is not like taking a $100 bill to the bank and asking for 100 ones (a "one" is one one-dollar bill). It is more like trading the $100 bill for 98 or 97 ones. Not many fools would enter into such a trade willingly. And yet, sophisticated members of the economic elite buy corporate shares on a daily basis. And even worse: many persons borrow money--and pay interest--to buy ("invest" in) shares.

So you would think that corporate shares, this second order abstraction, are distinctly better than plain old fiat money. Shares should offer enough advantages to offset the loss of value you incur the minute you buy them. But let me warn you: In a busy city, it would be distinctly more difficult to convert corporate shares into a decent lunch. And in a deserted island, your corporate shares would be just as irrelevant as your fiat money.

So why would anybody buy ("invest in") corporate shares? Well, while the real value of tangible wealth usually changes rather slowly, and the value of fiat money usually slowly decreases, the prices of corporate shares may change rapidly, and may go up without any set limit. And should that happen, you may sell your shares and make a big profit. So it is the lure of big bucks what draws buyers ("investors") to shares.

But be warned: the prices of corporate shares may also go down, all the way to zero. And should that happen, you just lost your money, plain and simple. And you don't even get free drinks as you would in a casino.

Because corporate shares are the ghosts of fiat money. The ghosts of the ghost of wealth. Second order ghosts. And when you venture into the netherworld of the netherworld, you should expect all kinds of unexpected things to happen. From the absolutely sublime to the totally dismal. 

Like the fine print will say somewhere: "substantial risk of loss". 

So risk what you can afford to lose. Because the netherworld of the netherworld holds the hope of profits, but also harbors the risk of loss. And a ghost of a ghost is a truly difficult creature to understand. A really slippery beast to try to harness.