>>There is some difference between 'stock price', 'stock value' and 'company value'. I feel that the root of your problem is that your imagination mixes them together. Stock price, that's where you started, is basically the same thing as any other price, i.e. you have buyers and sellers bargaining about the price. When they get into agreement, you have the price. Stock value is more long-term idea, i.e. some 'average' number around which stock price may ocsillate for long time, it includes elements of prognostication in regard to both company and general economy future performance. Company value is something derived and measured in accounting terms, i.e. assets and liabilities,as it stands now.
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>OK, but the paradox that I am targeting is that this calculated company value is, for companies whose shares are on the market, and which own lots of shares of other companies, the worth of this shares is expressed in the latest price. Now all the shares of one company change value just because some of them were sold today; therefore the value of each company holding such shares as assets also changes. That's how the production cost is calculated in some models, by the last price of the material, assuming that it brings the correction for inflation and that buying the same material at some previous price is pretty much out of the question. In some other models, everything is calculated in terms of monthly average cost price, in yet some others by average at the moment.
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>IMO, there's a lot of imaginary value tossed around. What happens to all those billions when Dow Jones falls from 14000 to 8000? They go to die, or they are now not imagined anymore, like a deity which ceases to exist when it loses believers? Or was some real value destroyed so the money had to evaporate to follow the change?
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>If all this volatile value is just selling future... then, know what, anyone who buys something they aren't quite sure how it works without taking economy 101 through 401, they do deserve that their real money goes the way of extinct imaginary money.
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>>Hopefully, you understand that I had to simplify all three notions. It would be naive to assume that all human knowledge in regard to these complicated matters could be squeezed in one short message.
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>Sellers do that all the time. Their buyers have just enough knowledge to know what they're buying, no matter how complicated those financial instruments are, right? ;)

One thing to bear in mind is that the sale of a few shares of a certain company, at a certain price, is really no more than that - the price at which buyers and sellers are willing to exchange a few shares. A clear example of this is when a company or raider wants to buy a large/controlling position in another company - usually this will command a significant premium over the most recent small-lot price. Conversely, if a holding company wants to sell a large position it may find it has to sell at a discount to be able to move the whole block.

As for "imaginary" value, another name for that would be "confidence". In general, the stock market is literally, and not in a negative way, a "confidence game". People extrapolating the price of a few small trades out to the whole "value" of a company are expressing confidence that the price is realistic. The more liquid the market - ready availability of willing buyers and sellers, plus "significant" fraction of a company's market cap trading per day - the more confidence the market will have that the current price represents "fair value".

One significant problem in the recent turmoil is that some of the large institutions that provide the mechanisms to maintain market liquidity are/were in danger of failing. If you believe that markets must be liquid to let them determine "fair prices", these institutions need support. In a perfect world, they should not require taxpayer support; whether they should be run by the government, tightly-regulated private firm(s), laissez-faire or ??? is another large topic of debate.

Confidence and risk have a complicated relationship. A risky investment does not necessarily reduce confidence, as long as the risk is expected and understood. Unexpected change reduces confidence, e.g. the sudden downgrading of various mortgage-backed "assets". In times of reduced confidence, liquid markets are more important than ever.

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When comparing capitalism in general, to other systems, here are a couple of high-level observations I've found handy over the years:

- Any system that fails to reward individual incentive/productivity will inevitably lose ground to one that does. Many forms of socialism, that rely on the forced redistribution of wealth from the "rich" to the "poor", fail badly on this measure

- If a store is well-stocked with a wide variety of quality goods, that an average person can readily afford, then "the system" is working pretty well - whatever that system may be. On that measure, compare modern Western democracies and their market/capitalist economies with any other societies in history

As Churchill might have said, capitalism is the absolute worst way to run an economy, except for all the others.