What If the Stock Market Didn't Exist?
What Would Be Different Without the Stock Market?
A world without the stock market might look very different. Things may be better in some ways, worse in others.
We begin by taking a look at some of the ways the stock market has helped your life, and the overall economy. However, stay tuned until the end of this article, because that's where we get into the good stuff - the downside to investing in shares.
Remember, when you buy a share of stock, you are buying a very tiny slice of that business. When the business is making money (typically when the economy roars along), your shares should increase in value.
Many businesses only exist thanks to the money which can be raised by selling stocks. In fact, many of our biggest and most important corporations got their start by raising millions in the Initial Public Offering stage of their lifecycle.
Subsequently, as companies need to raise more money down the line, the public markets provide an easy way for corporations to get that funding. As well, having shares trading publicly makes it easy for other businesses to buy, merge with, or acquire them.
However, after the original shares are sold by the companies' owners, the stock is then traded freely on the public exchanges. This is the moment where people are taking the jump from investor (who ostensibly was involved in the original funding of the business), to speculator (gambling that the shares might rise). There is no value added to the economy by trading stocks.
In fact, buying and selling shares on the market does not add any value, or provide any funds, to the underlying corporation. While the value of the stock serves as an indicator of the value of the company, it really doesn't matter to IBM or Apple if their shares rise or drop.
Of course, the greater the value of the shares, the greater the value of the company, and vice versa. Thus, if a business wants to raise more money, they can do so more easily the higher their stock is valued. Issuing new shares to raise $10 million is easier if the underlying corporation is valued at $5 billion than if they are valued at $5 million.
The greatest downside to the stock market is that it engenders income inequality. When the major indexes (such as the Dow Jones Industrial Average) climb, individuals who own shares typically see their net worth rise.
Those who are not involved with the stock market miss out in this case. Usually, this involves people and families in the lower and bottom end of the middle class income bracket.
Of course, investing can go both ways. Think of all the money lost in a stock market crash - people who were not shareholders of any companies were immune to the downside risk.
The end result, especially since the stock market has historically grown over time, is that investors (usually wealthier individuals when compared to non-investors) increase their "worth." The gap between the haves and the have nots grows wider.
A nation without a stock market would see more even income levels between the upper and the middle class. However, the overall economy would not be as strong, and many of our major corporations would not exist. Think of all the jobs and corporate taxes lost if we did not have Walmart, Costco, Apple, Exxon, and Cracker Barrel.