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Daniel Boyd

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It should be illegal to sell shares within 3 years of buying them

Once upon a time, shares were invented as a way for companies to generate capital for investment. The investor provided the capital to benefit from the profits that were generated on the basis of this investment. Turning investment into profit takes time.

Today, shares are bought and sold in microsecond transactions that purely aim to cash in on the largely random fluctuations that are generated by the trading system itself. Investors (and traders) earn money not through what their capital enables, but by their ability to second guess these self induced fluctuations. Immense amounts of money are tapped out of the system in this way without performing any service to society or industry.

As if that weren't bad enough, we now have a financial market flooded with derivatives and other constructions that are even further removed from any relation with investment and productivity.

Because society still needs money as a tool in the real economy, it has become enslaved to the financial markets, rather than the financial markets servicing society.

It's time to put and end to this parasitism, and the solution is simple. Make it illegal to sell shares within 3 years of buying them. This would ensure that investors provide capital on the basis of reasoned confidence in the future of their investment, and profit only from this return.

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  • Sep 27 2013: Lets make it clear - 90% of all stock trades, including options - the money does not go to the company. Only the initial sale money of the stock goes to company. What the trading does do is, hopefully, increase the value of the stock so if a company sells another offering of the stock, they will get a good price.

    The company also uses stock options as a reward for employees and as an incentive for employees to stay with the company until the options are vested. Higher stock prices make these options more valuable.

    If you want to affect the trading, one suggestion that has been floated is raise the tax on short term capital gains and increasing the holding period for long term capital gains. The holding period is 1 year and the effective tax on long term capital gains is from 0 to 20% depending on your bracket. Currently, short term capital gains are taxed as normal income.
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      Sep 27 2013: An interesting and very relevant addition - that all this trading, which forms the foundation of the current economy, largely passes the companies by that they supposedly relate to (and are really supposed to be financing). Kinda crazy.
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    Sep 27 2013: Hello Daniel,
    Your debate is nicely put, thank you. Behind your suggestion of a "3-year rule" though is a deeper question about regulating free-market capitalism. Underlying that is an even deeper issue, a conflict of interest, which is:

    The people who work in a company don't own it, and those who own it don't work in it.

    Until this issue is tackled, short-term gambling-profiteering will continue and ways will be found to dance around your 3-year rule.

    I suggest business ownership structures need to change, and I recommend the John Lewis Partnership as a good example in this respect.
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      Sep 27 2013: Even for me completely shutting down the stock markets is going a bit far ;-)

      Given that there is capital available to invest, I don't see anything wrong with shareholding, as long as it is that, and not share juggling.
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        Sep 27 2013: I agree that stock markets are here to stay; I was thinking there ARE viable alternatives to the standard share-owner model.
        Another suggestion sparked by your 3-year idea...., why not have a variable tax on gains in proportion to the time the shares are held? HFT trades where shares held for a few seconds or minutes can be taxed at 99.9%, and then a sliding scale to say 3+ years where profit on the sale of shares can be taxed at 5%, thereby discouraging short-term casino share-trading.
  • Sep 27 2013: Much easier solution:
    Make all public offerings from a company tax-exempt transactions. Exempt such "first sale" shares from the "capital gains" tax. Tax profits made from all other sales of stocks just like gambling winnings. It is, after all, what that such profits are. This will provide an incentive for investors to actually invest instead of playing the market.
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      Sep 27 2013: Sounds like an interesting alternative. Though I think the tax rate would have to be pretty steep to make much of a dent.
      • Sep 27 2013: Actually, it wouldn't. What would matter would be the differential. Zero taxes on offerings, normal taxes on resales. Of course, there would also be no sales tax on an offering. If the deal needs to be sweeter, exempt dividends on non-resold shares from taxation. It would be prudent to put a time limit on that exemption, though, so as to not create a hereditary "stock nobility".
        • Sep 27 2013: Already happening, people who bought Warren Buffet's stock and held it are now billionaires. 8>)). But i like the idea because it makes ipo's more attractive.
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    Sep 27 2013: in short, we should make illegal all the things that we don't understand.

    does that apply to modern physics?
    • Sep 27 2013: That was cruel.
      True.
      Funny.
      But cruel.
      I suppress laughter while trying to look disapproving.
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      Sep 27 2013: A curious response, particularly the reference to modern physics, which we actually understand fairly well and is not subject to human laws, so it would be pretty pointless.

      I assume that you're trying to imply that my objection to the way the stock exchanges work is based on ignorance. Certainly I'm no expert. But I don't think you need to be to see that financial markets have become self serving. Apparently you disagree?
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        Sep 27 2013: you again say "we understand". some people do, others don't. most don't. few do. why would we ban things based on that? people risk their own money. so even if it makes no sense, you have no right to interfere. but in fact the stock exchange, among a huge quantity of noise, do useful things. it prices stocks according to the traders' anticipation on the company's worth. and we should assume that in the long run, there is a correlation between traders' anticipation and reality.
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      Sep 27 2013: Please elaborate in short sentences and clear words what in your view is wrong in Daniels statement and what makes you think, that your understanding is superior.

      Don't use any external references, links, books or such alike.

      If you can't do that within 2000 characters, your claim is insignificant and noticed as 'trolling'.

      And what got physics to do with economics? If you like to explain this as well, open another reply in case you need all of the 2000 characters for the first part.
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    Sep 27 2013: What a shame I dodn't post this debate for longer - it was just getting interesting!!
    Thanks everyone for your lively contributions ;-)
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    Sep 27 2013: Are you thinking, then, that companies should largely be finding other ways of financing their operations, as fewer people would be willing to invest in them by buying shares?
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      Sep 27 2013: No. This is clearly the way for companies to finance their operations, but as Wayne points out, only a small percentage of what is going on ever gets anywhere near the companies, My proposal is exactly to set the stock market back to its primary function and purpose of financing companies. And why would fewer people invest? It would still be the best way of getting a return.
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        Sep 27 2013: The limit on how soon you can sell shifts more risk to the potential investor, which could be expected to influence his investment strategy away from the more risky investment toward the alternatives.
  • Sep 26 2013: Why would you want to stop people making money, if you agree with a Capitalist economy?
    • Sep 27 2013: Therefore, you believe that prostitution, heroin trade, methamphetamine, etc., should be legal, since outlawing these things prevents people from making money.
      • Sep 27 2013: The incentive is just the same, making money, they just happen to be of differing values on the moral scale.
        I understand where you are coming from, making things a little better, no more than, maybe walking onto the battlefield with a box of plasters. It's not going to tackle the real problem, knowing the price of everything and the value of nothing.
        • Sep 27 2013: Go talk to Cambodia and see what your kind of "solution" ended up doing. You want to simply make it illegal to turn a profit. China tried that. It failed. They backed off. Cambodia tried that, and the phrase "killing fields" was coined to describe what the Cambodian government did in the attempt to do so.
        • Sep 27 2013: Cambodia under Pol Pot outlawed making money.
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        Sep 27 2013: i, for one, believe that yes, all of the mentioned should be legal. but for different reason.
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        Sep 27 2013: Bryan, prostitution is legal in many countries and it just happened not to be in most states of yours.
        Heroin was officially traded as painkiller for many years and before its destructive character as well as its misuse was discovered. Other drugs, such as Marijuana, are legal in some countries as well.
        Methamphetamine is in use for treating ADHD and also available in other medical products.

        So for many of these services and products exist non-criminal and well accepted markets in which trade is done and money earned. But I think it is the 'misuse' of those you were referring to?
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      Sep 27 2013: This thread is completely off track. I've got nothing against money or earning money. I just think that earning money should involve creating or providing something of value. I don't see what financial trading contributes to society that justified the amount of money that it 'earns'. Perhaps I am missing something here though. I'm open to suggestion if anyone can come up with a justification.