Their corresponding entry would be “equity” IIUC. So if Alice has $100 of stock in company X, that means Alice paid $100 for that stock (which now may have higher or lower market value, but the book still shows $100 worth for now).
If Alice bought the stock from Bob, who himself paid $80 for it, then Bob would have one entry for the buy and one entry for the sell, at $80 and $100 respectively. Those $80 and $100 entries both have corresponding opposite-sign entries in somebody else’ books.
If the stock was originally issued to Bob for $80 by company X… I don’t know the details of how that’s recorded, but at a high level company X has an entry for equity and IIUC they sold some of that equity (or perhaps diluted the equity of existing shareholders to free some up, and then sold the freed-up equity). So, again at a high level where I don’t know the low-level details, company X traded some equity (which is an entry in their books) for $80.
Let’s say Alice buys 100 shares of Microsoft stock for $100. Then Microsoft implements a new management style that makes them much more effective, doubling the stock price. For emphasis on the new price, Bob then buys 1 share of Microsoft stock for $2. Alice’s shares are now worth $200, but the extra $100 doesn’t seem to have come from someone’s transactions. This $100 would conventionally be considered capital owned by Alice, but the actual substance of this capital is purely based on the new management style of Microsoft, rather than Microsoft’s assets.
I have some big machine (a combine harvester). The machine is worth a lot more than the individual components (gears, screws and so on) that make it up. Similarly, Microsoft is worth more than all the office buildings, patents etc that make it up put together.
So, value is not just in the number of physical things, but in the arrangement of them. I suppose that, ideally, the price difference between a bunch of gears and screws and a combine harvester should be equal to the cost of paying someone to assemble those gears and screws into one. So the price difference between Microsoft the company and all its stuff should be equal to the cost of hiring a bunch of managers to turn a similar amount of stuff into another Microsoft. Put that way ignoring that “arrangement value” does seem a bit artificial.
Alice’ shares have a $200 market price, but the accountants aren’t using that price on the books yet (unless they make a separate move to “mark to market”). Accounting values are not market values. This is one of the major reasons why I have those cautionary notes about accounting conventions throughout the post.
That may apply to bonds (am not familiar with that), but I don’t think double entry accounting is used to decide the value of stocks?
Their corresponding entry would be “equity” IIUC. So if Alice has $100 of stock in company X, that means Alice paid $100 for that stock (which now may have higher or lower market value, but the book still shows $100 worth for now).
If Alice bought the stock from Bob, who himself paid $80 for it, then Bob would have one entry for the buy and one entry for the sell, at $80 and $100 respectively. Those $80 and $100 entries both have corresponding opposite-sign entries in somebody else’ books.
If the stock was originally issued to Bob for $80 by company X… I don’t know the details of how that’s recorded, but at a high level company X has an entry for equity and IIUC they sold some of that equity (or perhaps diluted the equity of existing shareholders to free some up, and then sold the freed-up equity). So, again at a high level where I don’t know the low-level details, company X traded some equity (which is an entry in their books) for $80.
Let’s say Alice buys 100 shares of Microsoft stock for $100. Then Microsoft implements a new management style that makes them much more effective, doubling the stock price. For emphasis on the new price, Bob then buys 1 share of Microsoft stock for $2. Alice’s shares are now worth $200, but the extra $100 doesn’t seem to have come from someone’s transactions. This $100 would conventionally be considered capital owned by Alice, but the actual substance of this capital is purely based on the new management style of Microsoft, rather than Microsoft’s assets.
I have some big machine (a combine harvester). The machine is worth a lot more than the individual components (gears, screws and so on) that make it up. Similarly, Microsoft is worth more than all the office buildings, patents etc that make it up put together.
So, value is not just in the number of physical things, but in the arrangement of them. I suppose that, ideally, the price difference between a bunch of gears and screws and a combine harvester should be equal to the cost of paying someone to assemble those gears and screws into one. So the price difference between Microsoft the company and all its stuff should be equal to the cost of hiring a bunch of managers to turn a similar amount of stuff into another Microsoft. Put that way ignoring that “arrangement value” does seem a bit artificial.
Alice’ shares have a $200 market price, but the accountants aren’t using that price on the books yet (unless they make a separate move to “mark to market”). Accounting values are not market values. This is one of the major reasons why I have those cautionary notes about accounting conventions throughout the post.