Mother, can I trust the stock market?

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whodidntante
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Mother, can I trust the stock market?

Post by whodidntante » Tue Sep 11, 2018 10:10 pm

I was watching a badly dubbed Netflix original movie. The main characters were involved in a scheme to create and sell fake Treasury bonds in the Netherlands during the war. Funny, right? Well, it got me thinking. How does authentication work in modern capital markets?

For example, how can I know that my shares of stock and my bonds are genuine and mine alone? Can some malicious person potentially inject fake securities (say, shares of Microsoft) or sell the same shares more than once? How are the transactions balanced?

My understanding is that trading is anonymous, and there are several exchanges, dark pools, market makers, etc. that one can deal with, even if one is not aware one is dealing with them. Is the system secure or is it based on pure motives and perfect execution among these participants?

I think I know some of these answers but I want to get some input to check my understanding.

HEDGEFUNDIE
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Re: Mother, can I trust the stock market?

Post by HEDGEFUNDIE » Tue Sep 11, 2018 10:12 pm

Read this and try not to freak out

https://www.bloomberg.com/view/articles ... any-shares
Essentially the way everyone owns stock is:

Cede & Co., a nominee of the Depository Trust Co., owns all the stock in all the companies.
DTC keeps a list of its "participants" -- banks and brokers -- who "really" own that stock, and how much each of them own.
The participants, in turn, keep lists of "beneficial owners" -- people and funds -- who really really own the stock, and how much each of them own.
So if you own stock, what you really have is an entry in your broker's database, and your broker in turn has an entry in DTC's database, and DTC (well, Cede) has an entry in the company's database of shareholders of record. If you sell the stock, your broker takes it out of your account (at your broker), and DTC takes it out of your broker's account (at DTC), and DTC adds it to the buyer's broker's account (at DTC), and the buyer's broker adds it to the buyer's account (at the buyer's broker). As far as the company is concerned, Cede owned the stock the whole time.

Grt2bOutdoors
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Re: Mother, can I trust the stock market?

Post by Grt2bOutdoors » Tue Sep 11, 2018 10:19 pm

^^ It helps to read the ENTIRE article and not just a snip of it. Furthermore, DTC is not the only transfer/registrar agent for companies, they are the official books and records keeper for broker/dealers, banks and companies but not all of them. Oh, and those of us who hold the actual stock certificate, yes, remember those color pieces of work (well some of them), they are totally valid and yes, you do own your shares. :wink:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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willthrill81
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Re: Mother, can I trust the stock market?

Post by willthrill81 » Tue Sep 11, 2018 10:39 pm

HEDGEFUNDIE wrote:
Tue Sep 11, 2018 10:12 pm
Read this and try not to freak out

https://www.bloomberg.com/view/articles ... any-shares
Essentially the way everyone owns stock is:

Cede & Co., a nominee of the Depository Trust Co., owns all the stock in all the companies.
DTC keeps a list of its "participants" -- banks and brokers -- who "really" own that stock, and how much each of them own.
The participants, in turn, keep lists of "beneficial owners" -- people and funds -- who really really own the stock, and how much each of them own.
So if you own stock, what you really have is an entry in your broker's database, and your broker in turn has an entry in DTC's database, and DTC (well, Cede) has an entry in the company's database of shareholders of record. If you sell the stock, your broker takes it out of your account (at your broker), and DTC takes it out of your broker's account (at DTC), and DTC adds it to the buyer's broker's account (at DTC), and the buyer's broker adds it to the buyer's account (at the buyer's broker). As far as the company is concerned, Cede owned the stock the whole time.
That doesn't concern me nearly as much as the fact that most of my assets could be argued to be nothing more than ones and zeroes of computer code.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

GrowthSeeker
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Re: Mother, can I trust the stock market?

Post by GrowthSeeker » Tue Sep 11, 2018 10:54 pm

nice Pink Floyd reference (the title)

"Mother do you think they'll drop the bomb?
Mother do you think they'll like this song?
Mother do you think they'll try to break my balls?
Ooh, ah
Mother should I build the wall?
Mother should I run for President?
Mother should I trust the government? <------ this line
Mother will they put me in the firing line?
Ooh ah,
Is it just a waste of time?
..."

OK, sorry, off topic. Carry on.
Cheers.
Just because you're paranoid doesn't mean they're NOT out to get you.

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Portfolio7
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Re: Mother, can I trust the stock market?

Post by Portfolio7 » Tue Sep 11, 2018 10:59 pm

willthrill81 wrote:
Tue Sep 11, 2018 10:39 pm
HEDGEFUNDIE wrote:
Tue Sep 11, 2018 10:12 pm
Read this and try not to freak out

https://www.bloomberg.com/view/articles ... any-shares
Essentially the way everyone owns stock is:

Cede & Co., a nominee of the Depository Trust Co., owns all the stock in all the companies.
DTC keeps a list of its "participants" -- banks and brokers -- who "really" own that stock, and how much each of them own.
The participants, in turn, keep lists of "beneficial owners" -- people and funds -- who really really own the stock, and how much each of them own.
So if you own stock, what you really have is an entry in your broker's database, and your broker in turn has an entry in DTC's database, and DTC (well, Cede) has an entry in the company's database of shareholders of record. If you sell the stock, your broker takes it out of your account (at your broker), and DTC takes it out of your broker's account (at DTC), and DTC adds it to the buyer's broker's account (at DTC), and the buyer's broker adds it to the buyer's account (at the buyer's broker). As far as the company is concerned, Cede owned the stock the whole time.
That doesn't concern me nearly as much as the fact that most of my assets could be argued to be nothing more than ones and zeroes of computer code.
I take some comfort that people with an immensely bigger stake than I in the market not only exist but hold a lot of political power. If my money goes, so does theirs. And if just a few of the very rich were to survive an event which wiped out 98% of stock holders, then there are a whole lot of motivated and generally innovative and successful people that are mad as hell and ready to pull the whole system down. This is perhaps a sloppy argument, but I do think there is something to it.
An investment in knowledge pays the best interest.

mindboggling
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Re: Mother, can I trust the stock market?

Post by mindboggling » Tue Sep 11, 2018 11:22 pm

As the poet Charles Bukowski once said:

"We believe like dogs believe...
In broken mathematics, We estimate our prize, --Emily Dickinson

HEDGEFUNDIE
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Re: Mother, can I trust the stock market?

Post by HEDGEFUNDIE » Tue Sep 11, 2018 11:30 pm

Portfolio7 wrote:
Tue Sep 11, 2018 10:59 pm
willthrill81 wrote:
Tue Sep 11, 2018 10:39 pm
HEDGEFUNDIE wrote:
Tue Sep 11, 2018 10:12 pm
Read this and try not to freak out

https://www.bloomberg.com/view/articles ... any-shares
Essentially the way everyone owns stock is:

Cede & Co., a nominee of the Depository Trust Co., owns all the stock in all the companies.
DTC keeps a list of its "participants" -- banks and brokers -- who "really" own that stock, and how much each of them own.
The participants, in turn, keep lists of "beneficial owners" -- people and funds -- who really really own the stock, and how much each of them own.
So if you own stock, what you really have is an entry in your broker's database, and your broker in turn has an entry in DTC's database, and DTC (well, Cede) has an entry in the company's database of shareholders of record. If you sell the stock, your broker takes it out of your account (at your broker), and DTC takes it out of your broker's account (at DTC), and DTC adds it to the buyer's broker's account (at DTC), and the buyer's broker adds it to the buyer's account (at the buyer's broker). As far as the company is concerned, Cede owned the stock the whole time.
That doesn't concern me nearly as much as the fact that most of my assets could be argued to be nothing more than ones and zeroes of computer code.
I take some comfort that people with an immensely bigger stake than I in the market not only exist but hold a lot of political power. If my money goes, so does theirs. And if just a few of the very rich were to survive an event which wiped out 98% of stock holders, then there are a whole lot of motivated and generally innovative and successful people that are mad as hell and ready to pull the whole system down. This is perhaps a sloppy argument, but I do think there is something to it.
I mean, fiat currency only has meaning if we all believe in it, and we all have a strong incentive to continue believing, so it's not a sloppy argument at all.

jalbert
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Re: Mother, can I trust the stock market?

Post by jalbert » Tue Sep 11, 2018 11:46 pm

For example, how can I know that my shares of stock and my bonds are genuine and mine alone?
It varies by country.
Risk is not a guarantor of return.

MotoTrojan
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Re: Mother, can I trust the stock market?

Post by MotoTrojan » Tue Sep 11, 2018 11:59 pm

GrowthSeeker wrote:
Tue Sep 11, 2018 10:54 pm
nice Pink Floyd reference (the title)

"Mother do you think they'll drop the bomb?
Mother do you think they'll like this song?
Mother do you think they'll try to break my balls?
Ooh, ah
Mother should I build the wall?
Mother should I run for President?
Mother should I trust the government? <------ this line
Mother will they put me in the firing line?
Ooh ah,
Is it just a waste of time?
..."

OK, sorry, off topic. Carry on.
Cheers.
Welp, now I'll be listening to The Wall tomorrow during my workday.

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pokebowl
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Re: Mother, can I trust the stock market?

Post by pokebowl » Wed Sep 12, 2018 6:26 am

willthrill81 wrote:
Tue Sep 11, 2018 10:39 pm

That doesn't concern me nearly as much as the fact that most of my assets could be argued to be nothing more than ones and zeroes of computer code.
Its only an issue if you find a 2 hidden in there somewhere.
There is nothing more expensive than something offered for free.

aristotelian
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Re: Mother, can I trust the stock market?

Post by aristotelian » Wed Sep 12, 2018 6:35 am

Relatedly, what is to stop VG from secretly replacing VTSAX with contracts that follow the index? Is there any reason why we need to actually own shares of the index and the underlying stocks?

GrowthSeeker
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Re: Mother, can I trust the stock market?

Post by GrowthSeeker » Wed Sep 12, 2018 6:40 am

aristotelian wrote:
Wed Sep 12, 2018 6:35 am
Relatedly, what is to stop VG from secretly replacing VTSAX with contracts that follow the index? Is there any reason why we need to actually own shares of the index and the underlying stocks?
I'm not sure, but wouldn't that cost more than simply buying the haystack and drive up the E.R. (or drive down profits)?
Just because you're paranoid doesn't mean they're NOT out to get you.

aristotelian
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Re: Mother, can I trust the stock market?

Post by aristotelian » Wed Sep 12, 2018 7:42 am

GrowthSeeker wrote:
Wed Sep 12, 2018 6:40 am
I'm not sure, but wouldn't that cost more than simply buying the haystack and drive up the E.R. (or drive down profits)?
Depends how much they charge. I don't see any reason why it couldn't be done at zero or close to zero cost. Intuitively it would seem much simpler than owning partial shares of all those stocks. I guess the hard part would be finding someone on the other side of the contract.

MJW
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Re: Mother, can I trust the stock market?

Post by MJW » Wed Sep 12, 2018 1:42 pm

Mother do you think the market’s wrong?
Mother do you think it’ll crash before too long?
Mother do you think I move from stocks to bonds?
Ooh, ah…
Mother should I make the call?

Mother should I trust the stock market?
Mother should I delay retirement?
Mother will I achieve FI before I die?
Ooh, ah…
Is it just a waste of time?

Hush now baby, baby, don’t you cry.
Mama’s gonna make all of your choices for you
Mama’s gonna seek out a broker that’s true
Mama’s gonna save you from outrageous fees.
She doesn’t trust gold but she’s all right with REITs.
Mama’s gonna keep Edward Jones out of reeeach.
Ooh baby, ooh baby, ooh baby
Of course mama’s gonna handle it all

Mother do you think I’ve saved enough for me?
Mother do you think International’s dangerous, to me?
Mother…
Last edited by MJW on Wed Sep 12, 2018 1:55 pm, edited 3 times in total.

livesoft
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Re: Mother, can I trust the stock market?

Post by livesoft » Wed Sep 12, 2018 1:45 pm

GrowthSeeker wrote:
Tue Sep 11, 2018 10:54 pm
nice Pink Floyd reference (the title)

"Mother do you think they'll drop the bomb?
Mother do you think they'll like this song?
Mother do you think they'll try to break my balls?
Ooh, ah
Mother should I build the wall?
Mother should I run for President?
Mother should I trust the government? <------ this line
Mother will they put me in the firing line?
Ooh ah,
Is it just a waste of time?
..."

OK, sorry, off topic. Carry on.
Cheers.
What? Did you say Pink Floyd: Here you go:
viewtopic.php?t=182319
Wiki This signature message sponsored by sscritic: Learn to fish.

GrowthSeeker
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Re: Mother, can I trust the stock market?

Post by GrowthSeeker » Wed Sep 12, 2018 3:58 pm

livesoft wrote:
Wed Sep 12, 2018 1:45 pm
What? Did you say Pink Floyd: Here you go:
viewtopic.php?t=182319
That is awesome, livesoft.
Just because you're paranoid doesn't mean they're NOT out to get you.

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JoMoney
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Re: Mother, can I trust the stock market?

Post by JoMoney » Wed Sep 12, 2018 4:05 pm

Mistakes happen, but tracking of securities like stocks is pretty darn good. We don't have bearer bonds anymore. If you want some gruesome stories look into title disputes on land.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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nisiprius
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Re: Mother, can I trust the stock market?

Post by nisiprius » Wed Sep 12, 2018 5:44 pm

whodidntante wrote:
Tue Sep 11, 2018 10:10 pm
...For example, how can I know that my shares of stock and my bonds are genuine and mine alone? Can some malicious person potentially inject fake securities (say, shares of Microsoft) or sell the same shares more than once?...
As I understand it, the answer is "SIPC insurance." (And private insurance, provided by most? all? brokerages, that picks up where SIPC leaves off). If your shares of stock are held in a brokerage that is a member of the SIPC, and you have a brokerage statement that shows you own 100 shares of stock, then the SIPC guarantees that you do, and will make good if it turns out that, due to fraud or hacking or faulty accounting, you do not.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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villars
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Re: Mother, can I trust the stock market?

Post by villars » Thu Sep 13, 2018 10:00 pm

My understanding is that the stocks are actually in the hands of a custodian. And that financial institutions have to run periodic 3rd party audits to confirm that. At least that is what 401k plans seem to do.

If someone lies and defrauds stockholders, SIPC will step in to reimburse them. It did so in the case of Bernie Madoff.

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