Profiting from the PWC Money Tree
"The hardest part seems to be knowing exactly when to sell the stock.  Well yes, that's the problem with all stock investing. Reports come out all the time, sometimes even from very smart people with no motivation to lie, about expected earnings for this company, or for that industry. Whether those predictions come true is something you will only find out with time. What you are considering is using financial information available to you (and equally available to the public) to make investment choices. This is called 'fundamental analysis'; that is, the analysis of the fundamentals of a business and what it should be worth. It forms the basis of how many investment firms decide where to put their money.  In a perfectly 'efficient' market, all information available to the public is immediately factored into the market price for that company's stock. ie: if a bank report states with absolute certainty (through leaked documents) that Coca-Cola is going to announce 10% revenue growth tomorrow, then everyone will immediately buy Coca-Cola stock today, and then tomorrow there would be no impact. Even if PwC is 100% accurate in its predictions, if the rest of the market agrees with them, then the price at the time of IPO would equal the future value of the cashflows, meaning there would be no gain unless results surpassed expectations. So what you are proposing is to take one sliver of the information available to the public (have you also read all publicly available reports on those businesses and their industries?), and using that to make a high risk investment. Are you going to do better than the investment firms that have teams of researchers and years of experience in the investment world? You can do quite well by picking individual stocks, but you can also lose a lot of money if you do it haphazardly. Be aware that there is risk in doing any type of investing. There is higher than average risk if you invest in equities ('the stock market'). There is higher risk still, if you pick individual stocks. There is yet even higher risk, if you pick small startup companies.  There are some specific interesting side-elements with your proposal to purchase stock about to have an IPO - those are better dealt with in a separate question if you want more information; search this site for 'IPO' and you should find a good starting point. In short, the company about to go public will hire a firm of analysts who will try to calculate the best price the public will accept for an offering of shares. Stock often goes up after IPO, but not always. Sometimes the company doesn't even fill its full IPO order, adding a new type of risk to a potential investor, that the stock will drop on day 1. Consider an analogy outside the investing world:  Let's say Auto Trader magazine prints an article that says ""all 2015 Honda Civics are worth $15,000 if they have less than 50,000 Miles."" Assume you have no particular knowledge about cars. If you read this article, and you see an ad in the paper the next day for a Honda Civic with 40k miles, should you buy it for $14k? The answer is not without more research. And even if you determine enough about cars to find one for $14k that you can reasonably sell for $15k, there's a whole world of mechanics out there who buy and sell cars for a living, and they have an edge both because they can repair the cars themselves to sell for more, and also because they have experience to spot low-offers faster than you. And if you pick a clunker (or a stock that doesn't perform even when everyone expected it would), then you could lose some serious money. As with buying and selling individual stocks, there is money to be made from car trading, but that money gets made by people who really know what they're doing. People who go in without full information are the ones who lose money in the long run."
"I think the key concept here is future value.  The NAV is essentially a book-keeping exercise- you add up all the assets and remove all the liabilities.  For a public company this is spelled out in the balance sheet, and is generally listed at the bottom.  I pulled a recent one from Cisco Systems (because I used to work there and know the numbers  ;-) and you can see it here: roughly $56 billion... https://finance.yahoo.com/q/bs?s=CSCO+Balance+Sheet&annual  Another way to think about it: In theory (and we know about this, right?) the NAV is what you would get if you liquidated the company instantaneously.  A definition I like to use for market cap is ""the current assets, plus the perceived present value of all future earnings for the company""... so let's dissect that a little.  The term ""present value"" is really important, because a million dollars today is worth more than a million dollars next year.  A company expected to make a lot of money soon will be worth more (i.e. a higher market cap) than a company expected to make the same amount of money, but later.  The ""all future earnings"" part is exactly what it sounds like.  So again, following our cisco example, the current market cap is ~142 billion, which means that ""the market"" thinks they will earn about $85 billion over the life of the company (in present day dollars)." You'd need millions of dollars to trade the number of shares it would take to profit from these penny variations.  What you bring up here is the way high frequency firms front-run trades and profit on these pennies. Say you have a trade commission of $5.  Every time you buy you pay $5, every time you sell you pay $5.  So you need a gain in excess of $10, a 10% gain on $100.  Now if you wanted to trade on a penny movement from $100 to $100.01, you need to have bought 1,000 shares totaling $100,000 for the $0.01 price movement to cover your commission costs.  If you had $1,000,000 to put at risk, that $0.01 price movement would net you $90 after commission, $10,000,000 would have made you $990.  You need much larger gains at the retail level because commissions will equate to a significant percentage of the money you're investing. Very large trading entities have much different arrangements and costs with the exchanges.  They might not pay a fee on each transaction but something that more closely resembles a subscription fee, and costs something that more closely resembles a house. Now to your point, catching these price movements and profiting.  The way high frequency trading firms purportedly make money relates to having a very low latency network connection to a particular exchange.  Their very low latency/very fast network connection lets them see orders and transact orders before other parties.   Say some stock has an ask at $101 x 1,000 shares.  The next depth is $101.10.  You see a market buy order come in for 1,000 shares and place a buy order for 1,000 shares at $101 which hits the exchange first, then immediately place a sell order at $101.09, changing the ask from $101.00 to $101.09 and selling in to the market order for a gain of $0.09 per share. Yes, one such strategy is dividend arbitrage using stock and in the money options. You have to find out which option is the most mispriced before the ex-dividend date. "It's not a ponzi scheme, and it does create value. I think you are confusing ""creating value"" and ""producing something"". The stock market does create value, but not in the same way as Toyota creates value by making a car. The stock market does not produce anything. The main way money enters the stock market is through investors investing and taking money out.   The only other cash flow is in through dividends and out when businesses go public.  &  The stock market goes up only when more people invest in it. Although the stock market keeps tabs on Businesses, the profits of Businesses do not actually flow into the Stock Market. Earnings are the in-flow that you are missing here. Business profits DO flow back into the stock market through earnings and dividends. Think about a private company: if it has $100,000 in profits for the year then the company keeps $100,000, but if that same company is publicly traded with  100,000 shares outstanding then, all else being equal, each of those shares went up by $1. When you buy stock, it is claimed that you own a small portion of the company. This statement has no backing, as you cannot exchange your stock for the company's assets. You can't go to an Apple store and try to pay with a stock certificate, but that doesn't mean the certificate doesn't have value. Using your agriculture example, you wouldn't be able to pay with a basket of tomatoes either. You wouldn't even be able to pay with a lump of gold! We used to do that. It was called the barter system.  Companies also do buy shares back from the market using company cash. Although they usually do it through clearing-houses that are capable of moving blocks of 1,000 shares at a time." Apart from investing in their own infrastructure, profits can be spent purchasing other companies, (Mergers and Acquisitions) investing in other securities, and frankly whatever they please. The idea here is that publicly traded companies have a fiduciary duty to their shareholders to make as much money as they can with the resources (including cash, but including so much more than that) available to the company. It happens that the majority of huge companies eventually stopped growing and figured out that they weren't good at making money outside their core discipline and started giving the money back through dividends, but that norm has been eroded by tech companies that have figured out how to keep growing and driving up share prices even after they become giants. Shareholders will pressure management to issue dividends if share prices don't keep going up, but until the growth slows down, most investors hang on and don't rock the boat. You won't be able to know the trading activity in a timely, actionable method in most cases. The exception is if the investor (individual, fund, holding company, non-profit foundation, etc) is a large shareholder of a specific company and therefore required to file their intentions to buy or sell with the SEC. The threshold for this is usually if they own 5% or greater of the outstanding shares. You can, however, get a sense of the holdings for some of the entities you mention with some sleuthing. Publicly-Traded Holding Companies Since you mention Warren Buffett, Berkshire Hathaway is an example of this. Publicly traded companies (that are traded on a US-based exchange) have to file numerous reports with the SEC. Of these, you should review their Annual Report and monitor all filings on the SEC's website. Here's the link to the Berkshire Hathaway profile. Private Foundations Harvard and Yale have private, non-profit foundations. The first place to look would be at the Form 990 filings each is required to file with the IRS. Two sources for these filings are GuideStar.org and the FoundationCenter.org. Keep in mind that if the private foundation is a large enough shareholder in a specific company, they, too, will be required to file their intentions to buy or sell shares in that company. Private Individuals Unless the individual publicly releases their current holdings, the only insight you may get is what they say publicly or have to disclose — again, if they are a major shareholder. "If i do this, I would assume I have an equal probability to make a profit or a loss. The ""random walk""/EMH theory that you are assuming is debatable. Among many arguments against EMH, one of the more relevant ones is that there are actually winning trading strategies (e.g. momentum models in trending markets) which invalidates EMH.  Can I also assume that probabilistically speaking, a trader cannot do worst than random? Say, if I had to guess the roll of a dice, my chance of being correct can't be less than 16.667%. It's only true if the market is truly an independent stochastic process. As mentioned above, there are empirical evidences suggesting that it's not.  is it right to say then that it's equally difficult to purposely make a loss then it is to purposely make a profit?  The ability to profit is more than just being able to make a right call on which direction the market will be going. Even beginners can have a >50% chance of getting on the right side of the trades. It's the position management that kills most of the PnL." Honestly, I’m not sure I understand your point. The figures suggest to me that the business invests (higher capex and amortisation) and grows it’s revenues and cash flow.  D&amp;A can be higher than new capex for a number of reasons including accelerated amortisation for tax purposes.  Why is D&amp;A contribution (actually i prefer to separate the concepts of P&amp;L and cash flow) to operating cash flow a problem or why does it evidence manipulation? Its one of the main points.  Transfer pricing includes discretionary decisions and is part of BEPS.  Its also completely unnecessary:  Pay taxes on revenue in country earned/sold.  Get tax credits/refunds in country were spending is made.  The reason why already profitable companies consider BEPS/tax arbitrage for HQ locations is because they get discretionary power over accounting profit allocation.  Tax policy should serve the society though, and this proposal encourages the spending that benefits society.  Its the usual case that the right answer is different than that being lobbied for. In the long term, a P/E of 15-25 is the more 'normal' range. With a 90 P/E, Facebook has to quadruple its earnings to get to normal. It this possible? Yes. Likely? I don't know.  I am not a stock analyst, but I love numbers and try to get to logical conclusions. I've seen data that worldwide advertising is about $400B, and US about $100B. If Facebook's profit runs 25% or so and I want a P/E of 20, it needs profit of $5B on sales of $20B (to reconcile its current $100B market cap). No matter what FB growth in sales is, the advertising spent worldwide will not rise or fall by much more than the economy. So with a focus on ads, they would need about 5% of the world market to grow into a comfortable P/E.  Flipping this around, if all advertising were 25% profit (a crazy assumption), there are $100B in profit to be had world wide each year, and the value of the companies might total $2T in aggregate.    The above is a rambling sharing of the reasonable bounds one might expect in analyzing a stock. It can be used for any otherwise finite market, such as soft drinks. There are only so many people on the planet, and in aggregate, the total soft drink consumption can't exceed, say 6 billion gallons per day. The pie may grow a bit, but it's considered fixed as an order of magnitude.   Edit - for what it's worth, as of 8/3/12, the price has dropped significantly, currently $20, and the P/E is showing as 70X. I'm not making any predictions, but the stock needs a combined higher earnings or lower valuation to still approach 'normal.' what is the mechanism by which they   make money on the funds that I have in   my account? Risk drives TD Ameritrade to look for profits, Turukawa's storytelling about 100,000$ and 500$ is trivial. The risk consists of credit risk, asset-liability risk and profit risk. The third, based on Pareto Principle, explains the loss-harvesting. The pareto distribution is used in all kind of decentralized systems such as Web, business and -- if I am not totally wrong -- the profit risk is a thing that some authorities require firms to investigate, hopefully someone could explain you more about it. You can visualize the distribution with rpareto(n, shape, scale) in R Statistics -program (free). Wikipedia's a bit populist description: In the financial services industry,   this concept is known as profit risk,   where 20% or fewer of a company's   customers are generating positive   income while 80% or more are costing   the company money. Read more about it here and about the risk here. As more people earn it, the value will dilute to some degree. However, I think for *some* parts of finance, the charter will retain usefulness. I mean, college degrees are *extremely* diluted, but they're still seen as a necessary requirement.  I see that happening for PM type of roles. Clearly anywhere it isn't useful now won't see appreciation in that later. Here is an example for you. We have a fictional company. It's called MoneyCorp. Its job is to own money, and that's all. Right now it owns $10,000. It doesn't do anything special with that $10,000 - it stores it in a bank account, and whenever it earns interest gives it to the shareholders as a dividend. Also, it doesn't have any expenses at all, and doesn't pay taxes, and is otherwise magic so that it doesn't have to worry about distractions from its mathematical perfection. There are 10,000 shares of MoneyCorp, each worth exactly $1. However, they may trade for more or less than $1 on the stock market, because it's a free market and people trading stock on the stock market can trade at whatever price two people agree on. Scenario 1. MoneyCorp wants to expand. They sell 90,000 shares for $1 each. The money goes in the same bank account at the same interest rate. Do the original shareholders see a change? No. 100,000 shares, $100,000, still $1/share. No problem. This is the ideal situation. Scenario 2: MoneyCorp sells 90,000 shares for less than the current price, $0.50 each. Do the original shareholders lose out? YES. It now has something like $55,000 and 100,000 shares. Each share is now worth $0.55. The company has given away valuable equity to new shareholders. That's bad. Why didn't they get more money from those guys? Scenario 3: MoneyCorp sells 90,000 shares for more than the current price, $2 each, because there's a lot of hype about its business. MoneyCorp now owns $190,000 in 100,000 shares and each share is worth $1.90. Existing shareholders win big! This is why a company would like to make its share offering at the highest price possible (think, Facebook IPO). Of course, the new shareholders may be disappointed. MoneyCorp is actually a lot like a real business! Actually, if you want to get down to it, MoneyCorp works very much like a money-market fund. The main difference between MoneyCorp and a random company on the stock market is that we know exactly how much money MoneyCorp is worth. You don't know that with a real business: sales may grow, sales may drop, input prices may rise and fall, and there's room for disagreement - that's why stock markets are as unpredictable as they are, so there's room for doubt when a company sells their stock at a price existing shareholders think is too cheap (or buys it at a price that is too expensive). Most companies raising capital will end up doing something close to scenario 1, the fair-prices-for-everyone scenario. Legally, if you own part of a company and they do something a Scenario-2 on you... you may be out of luck. Consider also: the other owners are probably hurt as much as you are. Only the new shareholders win. And unless the management approving the deal is somehow giving themselves a sweetheart deal, it'll be hard to demonstrate any malfeasance. As an individual, you probably won't file a lawsuit either, unless you own a very large stake in the company. Lawsuits are expensive. A big institutional investor or activist investor of some sort may file a suit if millions of dollars are at stake, but it'll be ugly at best. If there's nothing evil going on with the management, this is just one way that a company loses money from bad management. It's probably not the most important one to worry about. I don't know what you are asking. Can you give me an example of what fits the question?   That you use phrases like profit extraction make me think we have a different assumption base, so I think we have to find common syntactic ground before we can exchange ideas in a meaningful way. I would like to do so, though, so I hope you respond. Well they do have incentive, the more volume you trade the more they make in commission. The shop is mostly daytrading oriented but you can do whatever you want. From what I gather, alot of their revenue comes in the form of training programs (although they offer one for free when you sign up, mostly in equities) which are completely optional. Also, they're willing to sponsor me for my 7, which is good. I mean this is a super risky career move but you roll the dice when you enter prop trading, in more ways than one.