Non-finance people seem to think the stock market only exists for investing, which isn’t true at all. In fact outside of an IPO you are not investing into a company, but just trading a piece of a pie that already existed. The stock market has always been primarily about trading, and informational arbitrage is simply more efficient when you have computers calculating it
Baloney. Corporations compensate employees, management and executives in stock. Furthermore, they may use their stock as debt collateral, or flat-out purchase investments [e.g. startups or other companies] completely or partially with stock. For example Facebook purchased Whatsapp with $12 billion of Facebook shares, $3 billion RSUs, and $4 billion in cash [1].
Moral of the story: The higher your stock price, the lower your cost of capital.
[1] https://en.wikipedia.org/wiki/WhatsApp#Facebook_subsidiary_(...
Sure, the more valuable your company is (let’s not say stock price because really it’s your market cap and some other factors) the more it can leverage that to make deals. Not sure how that’s related to the function of the stock market itself
When a publicly traded company wants to grow, they can give the employee stock. The employee can turn around and sell the stocks on the market. As above, investors get a piece of the company, the employee gets paid, and there are more outstanding shares.
I'm not OP but I think their point was that the two cases are not so different. The line between what is "trading" and what is "investing" is not so easy to draw.
This assertion is false. The purchase of shares creates upwards pressure on the stock price, which reduces cost of capital.
If that's the case, why should it exist at all? Why don't we just outlaw it and send all the smart people working on it to go write software or cure cancer?
Allocation: (1) stock market rebalances share prices somewhat well, which means that (2) companies who produce more growth are valued more highly, which means that (3) those companies, which frequently hold some sellable stock, can receive more money from investing those stocks, which means that (4) the economy grows more.
So since the stock market allocates resources well (in comparison to old people making deals on golf courses). I'm not too convinced by step 3. Companies focus too much on making shareholders happy, who often have their own short-term deadlines.
Convergence: Given how quickly stock transactions are made nowadays, we can assume that the prices converge pretty quickly. As an extreme example, suppose a war started a day ago. In the past, people could hide this fact from you when you made an investment if you didn't read the newspaper in the morning. With the stock market, you can assume that the price of a stock reflects nearly all publically available info. You don't need to "do your own research"
Investment Fairness/Efficiency (not sure word would describe this): Investing in companies directly is more "efficient" than investing in a bank or bonds. You don't need to give money to some large investment firm, which takes their cut before directly investing in large companies. The "shortest path" (path with the least middlemen/overhead) to investing well often involves the stock market. You don't need to wait for the government to slowly do something with your money. You get to take advantage of all the research that people have done to make the stock market prices reasonable.
I've only taken a college class on finance so this is a question I also want to know as well. How does the stock market (or secondary market in general) truly benefit the economy and what are it's limitations?
edit: s/the market/value/
Buying a range of stocks and holding them for the long term may reduce your risks, but that doesn't mean it isn't speculation.
Speculation just means that you are buying something with the expectation that you will sell it for a higher value. When your assets don't produce direct value (such as dividends, rental income, functional utility, etc) then investment in those assets is speculation, regardless of the risk level or time frame.
Every disclaimer you will see in the trading world has the disclaimer "Past performance is not an indication of future performance".
Everything in trading is probabilities, which is a way of thinking humans mightily struggle with.
A good day to day example is when a weather forecast calls for an 80% chance for rain on the weekend, so you cancel your camping trip. It ends up not raining, and you curse the meteorologist for being wrong.
They were not wrong - yet most people say they were, showing they are unable to think in a probabilistic way.