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Uber Wants Your Money

Written by Briton Ryle
Posted March 20, 2019

Normally we think of the stock market as basically a list of public companies whose stock we may or may not own. After all, isn't that why they call it the S&P 500 Index?

Have you ever wondered why you sometimes hear the terms "equity markets" or "capital markets"?

There's a very good reason for this. And it has to do with what a stock certificate is. You probably know a stock certificate is a certificate of ownership of a company. You buy a couple shares of stock in Apple, and it means you own a very small percentage of Apple.

And because you're an owner, you are entitled to a share of Apple's net profits. Right now, that share of the profits works out to $2.92 for every share you own.

Pretty cool. But it doesn't really answer the question of why. Why can you buy shares of Apple and own part of the company? Is Apple just a bunch of super nice people who want to share their success with others?

Weeeeell, I don't wanna say they aren't nice... but that's not why Apple shares are readily available for you to purchase.

The reason you can easily become a part owner of Apple — or any of the other 4,000 or so publicly traded companies — is because somebody else doesn't want to be an owner any more (or they don't want to own as much). 

Everybody Has a Price

Quite literally, the equity market is a market where you can buy the equity of a company. The capital market is a place where you sell your ownership stake for cash money. 

Now, an owner wanting to sell his stake is not a warning sign. It doesn't mean there's something terrible coming down the pike that this owner can see and you can't. 

In many cases, the shares you can buy in the equity market have been owned by one person for years. Maybe they worked for the company as an employee and got shares as compensation... Maybe they lent the company some money and got shares in return...

The fact is, by the time shares show up for purchase on the New York Stock Exchange, they may have been owned by several different people. What these people have in common is that they each had a number at which they were willing to sell their ownership stake. 

Value is an interesting concept. When you've got a fat wad of cash in your pocket, eh, maybe you start throwing it around a little bit. A hedge fund guy I used to work with once paid like five grand to become a bona fide Kentucky Colonel. To him, being able to wear seersucker and have mint juleps on the lawn was worth five grand. But when you run out of bourbon, maybe you wish you had some of that five grand back. 

This is exactly the dynamic you get in bull and bear markets. 

In the bull market, you might place a "buy at the market price" order for Apple shares because you don't really care about a couple bucks here or there. You just want to own it. And then in a bear market, you'll put in a "sell at the market price" order because you don't really care about a couple bucks here or there. You just want as much of your cash back as possible. 

Buy Low, Sell High?

Most of the time, as investors, we don't think about what goes on at companies before they go public and their stock is available for purchase. But that's actually changing now that we have a TV show about startup companies and the venture capitalists who put up the loot that helps turn an idea into reality. 

Plus, we hear more about companies before they put the shares out for the public to buy in an initial public offering. Like Uber. Or Lyft. Both of these companies have announced their intention of letting you, John Q. Public, be an owner, too. 

And you know what? I am not interested in the least in being an owner of Uber. Yes, that's partly because the company loses a phenomenal amount of money, and they don't need mine (I'm perfectly capable of losing my own money, thank you very much!).

It's also because I know what they are up to. Venture capitalists have plowed billions into Uber. This money has built out the service, paid the insurance, hired the programmers, and so on and so forth. They've pushed this company about as far down the road as they can. And now they want their money. 

In the weeks to come, you're going to hear how amazing Uber is. What a game changer it is. How it will transition to the world of autonomous cars and be a leader. How there's gonna be autonomous Uber helicopters...

OK. Maybe all that's true. But that's not what this is about. When Uber goes public, it will be about one thing: money. More specifically, it's about your money. As in how they can get. (Personally, I'd rather be a Kentucky Colonel and ride around on a horse than be an owner of Uber.)

The sad fact is the venture capital game has gotten too big. IPOs aren't fun anymore. When Amazon went public, it was worth $600 million. And as one of the earliest internet IPOs, it fired the imagination. Today, companies don't go public until they are mature. Facebook was $100 billion (with a "B").

I've got some more thoughts on this trend, but this article is running long. I'll pick up the discussion with you on Monday.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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