Let's start by understanding what global market capitalization means. We'll go back to a 1999 example. On the New York Stock Exchange (NYSE), as of October 1999 there were 3,066 companies listed. One of them was IBM. A site like this one would tell you that IBM had 1,809,090,000 outstanding shares on October 21, 1999, and this page would tell you that the stock closed at $91 on October 21, 1999. That means that IBM's total capitalization was:
1,809,090,000 shares * $91 = $164,627,190,000
In other words, if all the shares of IBM were bought by someone for $91 per share, the person would have to pay $164 billion to buy IBM. If you perform that calculation across all 3,066 companies on the NYSE and add them all up, you get a total capitalization of $15 trillion.
The difference between the $6 trillion in the M3 money supply and the $15 trillion on the NYSE is that the $6 trillion are actual dollars, while the $15 trillion are all on paper. For example, on October 20, 1999, IBM closed at $107 per share, while on October 21, 1999, the number was $91 per share. The stock's price fell $16 in one day. On that day, 69,444,800 shares traded hands (about 3.8% of the total available shares). In terms of capitalization, IBM's shares lost:
1,809,090,000 shares * $16 = $28,945,440,000
On paper, $28 billion evaporated in one day. However, the vast majority of shares (96.2%) did not trade hands. All of those shareholders who did not trade their shares lost money only on paper, not in reality. If the stock bounced back to $107 the following day, then on paper they'd have lost nothing at all.
What this shows is that there is a difference between cash and value. There is a limited amount of cash, but there are many different things that have value to people -- cars, boats, houses, buildings, gold, land, books, roads, stocks and so on. These things all have value. In order to transfer ownership, we use cash to represent the value. Cash is the universal representation of value. If we didn't have cash, we would have to exchange objects of equal value whenever we wanted to buy something. That's called bartering, and it's generally an inconvenient means of purchase. As a society, we agree to use the limited quantity of cash as a universal object of value in our transactions because it makes transactions a lot easier.
These links will help you learn more:
- Quicken.com Investing Center
- New York Stock Exchange
- Directory Of Financial Glossaries
- How Stocks and the Stock Market Work
- How the Fed Works
- How do stock options work?
- If you took all of the gold in the world and put it in one place, how much would there be?
- How much money is "all the money in the world"? //]]]]> ]]>