Understanding the funny way the world economy works

As I mentioned in my latest post, I even don’t understand why the world economy crashed several months ago. The question was surrounding my mind for many days, so I couldn’t help to start looking for an answer.

If you know me a little, you should be aware I’m an excessively curious guy. I must be honest; this subject is really complex and broad… I had to expend hours and hours reading large boring articles, and nevertheless I just could understand too few. So, I can’t blame you if you get bored too.

So, here we go… let me show the results of my research. My starting point was some news headlines from the last months:

I want to remark some concepts from those articles. Quoting Wikipedia as usual:

Stock: In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company).

In my words: A little piece of a company translated into a piece of paper similar to a bill.

Stock market: is a private or public market for the trading of company stock and derivatives of company stock at an agreed price

In my words: A place where you can buy and sell stocks

Broker: A broker-dealer is a company or other organization that trades securities for its own account or on behalf of its customers.

In my words: Someone authorized to buy and sell stocks

Investment banking: Investment banks profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity and bond), as well as providing advice on transactions such as mergers and acquisitions.

In my words: The art of making money buying stocks and re-selling them adding some bucks to the initial cost. This transactions can include to buy and sell whole companies.

Of course, I could put a pretty endless list of terms above about financial stuff, but I want to keep things simple so far as I can. Believe me, this issue is really messy.

Ok, now that we got the basics, next question: How is defined the price of any stock? Well, here is where fun starts. The price is not constant at all because it depends on many factors:

  • Stability of the stock market
  • Current financial states of the company
  • Sales Projections
  • Others variables

Now, imagine you are a broker with a handful of stocks of the Company X. If the business goes bad, maybe you should sale your stocks, because your current price is falling and you don’t wanna lose money. But, if business goes well, maybe you should wait a while, then your initial price start to get up which means profits for you! When to sell? when to buy? that’s the key of everything.

As result of this model, the value of companies stocks change every moment. Brokers buy and sale stocks all the time while the market is open. Some people get rich and some other get poor. That’s the game… like in a roller coaster, you can get up or down in any moment.
Have you ever watched the New York Stock Exchange (NYSE) on TV? All those guys with elegant ties screaming together and pointing with his hands to another guys? Well, they are playing the game.

So, let’s try to understand what happens when economy crashes:

As far as I understand, around the world every some years occurs a phenomenon called “Economic Bubbles“. Let’s quote Wikipedia again: “trade in high volumes at prices that are considerably at variance with intrinsic values”
So clear! Isn’t it? Ok, in my words: A bubble occurs when for some reason that I don’t get yet, brokers start to sale and buy stocks using very high prices, assuming that companies they represent, are going to have a great year.
It looks like everybody get excited and start to buy stocks and more stocks, even asking for loans to pay them.

People bet their money expecting to get rich but then, companies production/sales are not so good, so stocks prices fall quickly and everyone starts to lose his investments. If you paid eight bucks for a stock, then now it’s worth five, so you lost three bucks. In a bad week, your stock could be worth cents at Friday!
Now, imagine that a lot of companies are having the same problem… how many money can disappear in one day? millions and millions of dollars! It’s like a domino effect.

The Dot-com bubble is one of the clearest examples of this situation. I could keep writing about this for the eternity, but I don’t want to bore you with this.

The truth is I even don’t understand why the world works in this “funny” way, the stock exchange model and all that weird way of playing with fortunes. I mean, where does all the money go when a bubble explodes?

For me, it looks like the Monopoly board game mixed with a lottery but using real money. Absolutely senseless! But, please, don’t blame me, I’m just 18. Now I see why I picked up Computer Science and not Economics :S Oh! yes, Computers and the Internet are my territory! my place!

Now I got a better idea about the world crisis. What I don’t know is: either should I feel better for that or scared? Is the world a “big casino” where few players bet the global fate? You tell me…

Have a nice day friends and watch your money! Chores time… 😉


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2 Responses to “Understanding the funny way the world economy works”

  1. pochp Says:

    ‘a “big casino” where few players can bet.’

    Grand way to depict the world economy!

  2. cibertito Says:

    Thanks my friend. I’m just a young GeeK trying to find answers 🙂

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