1. Why does the stock market matter?
Capitalists use the stock market to get their hands on money they need for investments. Bosses don’t try to squeeze profits out of workers just because they’re greedy. They are locked into a battle to get and stay ahead of their rivals so they can grab a bigger slice of profits.
This means that firms are forced to reinvest profits into more efficient production methods, such as the latest IT technologies or more powerful machinery.
Yet corporations don’t always have the vast amounts of money that are needed to make long-term investments.
Sometimes they take loans from banks, milk money from public sector contracts, or blackmail governments into giving them subsidies.
But to guarantee a steady reservoir of cash capitalists came up with the stock exchange—a giant swindle based on trading IOUs.
Companies issue shares—pieces of paper—on the stock market to raise money. These pieces of paper promise their buyers a “dividend”, a payout of future profits that will be made from the investment.
2. Is it just about raising money for investments?
A huge market grew up out of trading these bits of paper, with middle men, known as stockbrokers, who manage shares.
Stockbrokers were banned from the Royal Exchange merchant’s building for their “rowdy” behaviour in 1696. They set up shop in nearby Jonathan’s Coffee House and the London Stock Exchange was born.
The stock market has outgrown simply buying and selling companies’ shares to raise money for investment.
It is has become a giant casino where bankers play roulette—with grim effects for working class people’s lives.
One of the most socially useless functions is betting on “futures” prices.
Futures involves bets on the price movements of items such as crude oil, live cattle, orange juice or zinc.
The seller agrees to provide a good at a fixed price at some point in the future.
It’s these contracts that are traded on the futures market. Thousands of buyers and sellers are matched near instantly using electronic algorithms.
Another trade has quickly grown on top of this, which sees investors bet on the future prices of the actual commodities. If the price of food goes up millions can starve in the Global South, but some traders feast on the fortunes.
And traders can turn everything into a commodity.
The Volatility Index (Vix) used to be just about charting how volatile the US stock market was.
Anything above 30 would be a warning that serious troubles lay ahead—in 2008 it peaked just below 90.
Last week it hit 49.
But in 2004 the Chicago Board Options Exchange made VIX into a financial market where trades bet on the future position of the index. The VXX, one of the Vix products, was the fifth most heavily traded stock in the US in 2016.
3. Why has so much been invested in finance?
Karl Marx said that the financial sector was both “prophet” and “swindler” of capitalism.
Cheap credit has fuelled financial bubbles—such as rising housing prices—that make it seem that capitalists’ profits can endlessly expand.
Since the 1970s capitalism has suffered an underlying problem of low profitability in the “real economy” (see column right).
While capitalists hoard vast amounts of cash, they needed profitable areas to invest them in.
Because of the problems in the real economy, they invested cash in new financial markets and instruments and made a killing.
But finance also means that crises are all the more profound when they happen.
Marx called financial instruments, such as shares, fictitious capital.
Capital is “value” that workers’ labour makes, which capitalists then reinvest in order to make more profits.
The price of shares or futures contracts bears little resemblance to the amount of value workers create in the real economy.
This means the limits of capitalism’s growth are linked to what’s going on in the real economy of capitalist production.
If there isn’t enough value, financial bubbles will expand to the point where they burst.
While the US’s Dow Jones shares index has increased by 350 percent since 2008, the economy has only grown around 15 percent.
4. What makes the stock market go up and down?
Politicians and pundits talk about the stock market as if it is some sort of mysterious force that is outside human control.
They’ll say the “market” demands the government slashes public spending or companies axe jobs to “restore confidence”.
Donald Trump’s vice president Mike Pence said the tumbling of share prices last week was “simply the ebb and flow of our stock market”.
This is a cover to justify capitalists grabbing all the money in the good times and attacking workers when things go wrong.
In reality, those responsible for the stock market shocks are the capitalists who run the system.
Stockbrokers make money for their clients—everyone from local councils to company pension funds to banks—by gambling on how well a company is performing.
If a company is seen to be doing well—grabbing lots of profits—stockbrokers will buy shares and its stock price will go up.
But if a company isn’t making enough profits or seems like it’s about to go bust, they can quickly sell shares and make its stock price tumble.
This has big implications because it means firms have less cash.
For instance, outsourcing giant Carillion racked up huge debts and no longer seemed like it was syphoning off enough cash from public sector contracts.
Investors rushed to sell its shares and the stock price collapsed, precipitating its collapse.
5. Does it matter for working class people?
Shareholders who don’t sell quickly can often be left with near worthless pieces of paper in their hands. This means that bosses’ gambling on the stock market has a direct impact on working class people.
Most directly, workers’ money is drawn into the stock exchange through company pension funds, which buy up shares in companies.
Workers only get decent pension payouts
if a company’s stock price is doing well.
Nobody should be dependent on the gyrations of the stock exchange for their future income.
In addition many local councils also invest money on the stock exchange, which means they make more cuts if they lose out on investments.
And workers in companies whose stock price goes down are also affected.
Whenever the share price goes down, capitalists will try to regain the confidence of investors on the stock market.
This means attacking workers’ jobs, wages and terms and conditions to prove they are still profitable.
6. How will bosses react to the recent changes in the market?
Bosses can try to overcome low profitability by squeezing more out of workers—such as slashing wages or increasing working hours.
They could also let unprofitable firms go to the wall, which would clear space for their competitors to expand.
But the bosses’ Economist magazine argues that global capitalism is weighed down by an army of “zombie firms”.
These are dependent on very low interest rates that mean they can borrow at low cost.
The threat of rising interest rates was one of the reasons for the panic last week.
Many of these firms have been kept alive because capitalism can’t afford for many of them to go bust.
When capitalists are in trouble we can be they will try to make us pay.