Baseball cards as equities

Most Americans know of that sports fanatic who seriously trades baseball cards. I had a little interest in these things when young. Recently, I am had an idea using these sports memorabilia items as an example to explain the general operation of the stock market. First, I will define why stocks and baseball cards have any value.

Baseball card value is dependent upon a collector's desire to own the card. Rarity, nostalgia and the desire to complete a collection often add to a card's value. The actual card has no inherent economic value except what a trader is willing to pay.

Stock shares are portions of a business. Companies sell shares in initial public offerings to raise money. The owner of a share(s) owns a small portion of that company. Most shares are traded publicly on stock exchanges and these are known as public companies. We are going to focus on public companies for simplicity sake in this analogy. The only value a stock has except the listed price on an exchange comes from dividends. In most cases, dividends paid are on the order of a few percentage of a stock's listed value, not the main factor leading to ownership. Excluding dividends, the actual stock has no inherent economic value except what a trader is willing to pay.

Back to the baseball card analogy, we are going to have a giant conference where all of the biggest traders congregate to trade in auctions. The purpose of the auction is for buyers and sellers to get the best price for their cards. It determines a fair value for cards in the auction at that given point in time. English auctions (most common type in the US) work in a simple manner. An auctioneer will start announcing to the crowd a price or ask for a card. In the crowd, investors will start bids increasing the ask price of the card. When the ask price no longer increases, the bid and ask match. The auction for the given card is over and the card is sold to the bidder from the seller at the agreed price.

Alternate the scenario a little and the stock market basic operation will be represented. Picture the baseball card traders ditching their day jobs and trading baseball cards full time? Everyday, the same baseball card is traded at an auction. The mechanics of the auction change as follows:

1) The beginning ask price of the day is the ask/bid price from the previous day.

2) Bids can now take card price in both directions. Price can increase and decrease.

This is similar to the bidding found in stock markets, except this occurs for millions of shares (cards) hundreds of times per individual stock daily. Total stock exchanged on a market is on the order of a few billion daily. The stock market is nothing more than a complex auction house to trade stock between investors buying and selling stock. Stock markets themselves have no inherent value, the participants have the capital and stock. Participants are where a market's value lies.

This analysis covers stock market basics. It does not take into consideration advanced trading strategies such as shorting stock, options and day trading to name a few.