I've been involved in online trading, specifically with stock and index options, for several years. In this time, I've spent a great deal of time thinking about value and the fact that anything, be it a stock or currency or even a house, is worth exactly whatever someone else will pay for it. Sure, there are a million and one pricing models (especially in financial markets) that will tell you precisely what something should be worth. But in the final analysis, if nobody will pay that much, then it's not actually worth that price.
Let's illustrate this concept in a very simple fashion. I'm an American so I'll use U.S. currency to make my point.
What is a $20 bill worth? Without over thinking it and talking about inflation, exchange rates, etc. let's just say that it is generally believed to be worth $20.
Would you pay me $20 for a $20 bill? I'm going to guess probably not, as there would be no real reason to do so. You would have to go to the trouble of getting me your $20 and I would have to go to the trouble of giving you my $20 bill, and neither of us would be in a better position than we were before. Therefore, I would like to present the idea that a $20 bill is not actually worth $20 since nobody would likely pay $20 for it!
So how much would you pay for a $20 bill? Would you pay $19.99? Is it worth the effort for 1 cent? No? How about $19.50? $19? Shall I keep going?
In a free and fair market it is the market itself which determines value, and given a large enough market, that value should be fairly accurate. I read an article online some time ago about someone who decided to conduct an experiment just for fun. He put a new $5 bill up for auction online and began the biding at 1 cent. He crafted a creative description of the note, and waited to see the results. When it was all said and done, the bill did in fact sell - for slightly over $3. He then spoke with the winning bidder, who said he had made a profit many times online by purchasing currency for less than face value (including a $20 bill for less than $10 as I recall).
The conductor of the experiment left it at that - nothing more than a somewhat humorous exploration into what people think something is worth. But to me this meant so much more.
A dollar is not actually worth a dollar... so what is it worth? What would you trade for $1? For $20? For $100? $1,000? And if a dollar isn't actually worth a dollar, is a share of stock worth $50, or in fact anything at all?
The answer is yes. At any given moment it is worth precisely what someone is willing to pay for it. No more, no less. Money and value are merely ideas, they are not absolutes.
Consider this carefully the next time you are convinced that the stock, option, currency, house, or anything else you want to buy, is worth what you're about to pay.
Jonathan van Clute is a full time investor, educator, speaker, and online options and sports arbitrage trader. In addition to his business activities, he is also a musician, video editor/animator, and one of the world's greatest Segway Polo athletes. He can be reached via email at jonathan@PMLinvestments.com and is speaking at an upcoming teleseminar, visit http://www.snurl.com/vcfmv for details.
Strong credit saves real estate investors money on mortgage finance... Read More
You may like your financial advisor, but is he really... Read More
A barrel of oil bounced to over $60 Thu, which... Read More
Many people have, at one time or another, taken some... Read More
The Perfect Mutual Fund is the one you build yourself!The... Read More
For those who have never given their financial future a... Read More
How much are you willing to pay for a tank... Read More
As a trader, one of the key things that I... Read More
If there were one piece of advice that an investor... Read More
We've helped a number of clients develop business plans and... Read More
Q. What is a basket?A basket is a group of... Read More
Angel investors are individuals who invest in emerging business ventures.... Read More
While there is not a lack of information on annuities,... Read More
The Light Crude Continuous Contract fell from $67.70 a barrel... Read More
As a followup to a previous column, "Irreconcilable Differences," I... Read More
Rolling is defined in options online trading as moving a... Read More
A SEP is a special type of IRA. Under a... Read More
The Foreign Exchange Market, better known as FOREX, is a... Read More
Ever since the turn of the century, world stock markets... Read More
50% Of U.S. Households Invest In The Stock Market Individuals... Read More
It seems completely absurd that franchise buyers lie about their... Read More
Many people today are looking for annuity help. The biggest... Read More
For investors only... and for speculators who need to invest... Read More
You wouldn't build your home on anything less than a... Read More
Investing and Trading are not the same thing. The returns... Read More
One of the most common mistakes made by inexperienced investors... Read More
Gold Maple Leafs and Silver Maple Leafs are receiving packaging... Read More
According to Morton Pollack, CEO of PWS, The Laundry Company... Read More
Has your broker ever told you that a stock is... Read More
By definition, value investing is the process of selecting stocks... Read More
Tropical Storm Arlene formed as a tropical depression on June... Read More
"There is nothing more frightful than ignorance in action!" Johann... Read More
Do you ever feel like you haven't been told the... Read More
JewelryThe advantages are:? Gold Jewelry is the easiest of the... Read More
Are you ready to open your pathway to financial independence?Well... Read More
Let's first understand what maniac means. According to Webster a... Read More
Q: My youngest son wants to borrow $5,000 to start... Read More
Let me start by answering that question...if an annuity fits... Read More
"Hey Joe! I need help finding a broker. I notice... Read More
This column has often focused on intangible investments like stocks... Read More
You have rowed a boat at some time haven't you?... Read More
Stock market trading is a fascinating activity.There are so many... Read More
This article was originally featured in Daryl Guppy's 'Tutorials in... Read More
Location ? Once the holy grail only for real estate... Read More
Young readers know that March 4th is the birthday of... Read More
Investing in New Zealand might be much easier than investing... Read More
"Through wisdom is a house built. And by understanding it... Read More
Non-indexed mutual funds try to keep it secret that actively... Read More
Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More
While a U.S. Representative to the Asian Development Bank Executive... Read More
Has your broker ever told you that a stock is... Read More
There is an area in Brazil that has lower crime... Read More
Clean Up (includes the insides and the outside of a... Read More
It use to be said that once a company was... Read More
Okay, so I can tell you I have sat in... Read More
The last time you spoke with your broker did he... Read More
About 6 years ago I started to notice that certain... Read More
Scams and frauds are designed to take your money through... Read More
Margin is one of those things that novices find puzzling... Read More
The first point to mastering money management is that you... Read More
You know all the articles you read about annuities that... Read More
Need some insight on what you should really be striving... Read More
Ever since the turn of the century, world stock markets... Read More
Some time ago I attended a seminar where participants were... Read More
Even though inflation has been relatively quiet in the U.S.... Read More
When raising capital for a business venture, warrants are a... Read More
Investing |