Wow.  Now THAT is some cool stuff...

-Lucas

At 10:17 PM 5/12/2003 -0500, Charles Steinkuehler wrote:
>It really did "vaporize", but you first have to realize that it also 
>materialzied overnight, too.
>
>Not quite kindergarten scenerio, but hopefully not too hard to follow:
>
>- Seatle Joe forms WigiCorp, a trend-of-the-minute high-tech startup.
>
>- With a couple ideas scribbled on the back of a coctail napkin, Joe gets 
>enough money from venture firms to put up a website and hire lawyers to 
>structure an IPO.
>
>- WigiCorp "goes public", selling 10% of the company for 10 million 
>dollers (or $10 a share at the IPO offering price).  This puts the public 
>value of WigiCorp at $100 mil.
>
>- You were "lucky" enough to get in on the ground floor, and have 100 
>shares at the IPO offering price of $10 (for a $1000 total investment, and 
>a whopping 0.001% ownership stake in WigiCorp).
>
>- At this point, you go on a vacation to the bahamas or something, and 
>stop reading the financial reports :-)
>
>- 6 months later, you return from your trip(s) abroad, and find WigiCorp 
>stock is now worth $100 a share (total company valuation of $1 Bil, and 
>your $1000 investment is now worth $10,000).
>
>NOTE:  The share price reflects the price a buyer and seller agree on for 
>a specific sale.  While in the normal world this should reflect the true 
>market value of a company, in thinly traded stocks, or in situations where 
>investors are acting irrationally (ie everyone's trying to jump on board 
>the hotest/latest trend), prices can get disconnected from reality.  If 
>one moron...er investor is willing to pay $1000 a share for one share of 
>WigiCorp stock (instead of the "going" rate of $100), the *ENTIRE* 
>WigiCorp company (and all it's existing shareholders) get a 10X "virtual" gain.
>
>Let's be clear about that...someone else paid more money than you did for 
>something you bought, which makes it more valuable.  You do not gain (or 
>loose) any money until you actually sell the stock you bought. Although 
>it's possible in today's world to borrow against unrealized gains, invest 
>on margin, live off your credit card and purchase stock with your 
>paycheck, and other complex transactions, we're ignoring these for the 
>sake of this discussion.  Generally, however, if your $1000 investment 
>turns into something valued by the market at $10,000 or $100,000, you're 
>going to be feeling pretty good, and probably eyeing that new 
>car/house/girlfriend/whatever.
>
>- Encouraged by the performance of your portfolio, you leave on another 
>extended trip abroad...
>
>- When you return, WigiCorp stock has crashed.  It is now worth only 
>$0.10, and is about to be delisted.  You have not "lost" any money (that 
>only happens when you sell the stock), but WigiCorp has gone from a market 
>valuation of $100 Mil (when you bought at the IPO) to $1 Bil (at 
>$100/share) to a valuation of $1 Mil (likely the auction value of their 
>Aeron chairs, pool-table, and video games), and your initial investment of 
>$1000 has see a high "potential" value of $10,000, and is now worth a 
>"potential" $1.  Of course you won't know the *ACTUAL* value of your 
>investment until you actually sell it and see what someone is willing to pay.
>
>It's pretty easy to become a "paper millionare"...just create a company 
>structure, declare a few million shares stock (let's say 5 million), and 
>sell a share or two to your parents / wife / girlfriend / 
>high-schoool-buddy for $1 each.  Presto, you're the 99+% owner of a 
>company valued at 5 million dollers, putting your personal net worth at 
>$4,999,996 minus however much you're upside-down on your car loan 
>(assuming you sold one share each to the above groups...just don't let 
>your wife or girlfriend get ahold of the shareholder list!).  Of course, 
>if you try to sell a million shares for a million dollers, you might have 
>a much harder time of it!
>
>The engineering types I know familiar with statups call these "j-dollers" 
>or "i-dollers" (depending on whether you're preference is i or j for the 
>square root of -1), signifying their imaginary nature. Only when you sell 
>something for cold-hard cash do you get "real" money.
>
>So...it's actually pretty easy to wave the "magic wealth creation wand", 
>and even easier to see the whole mess disappear into the thin air from 
>whence it came.
>
>--
>Charles Steinkuehler
>charles@steinkuehler.net
>
>
>
>