What If the Stock Market Did Not Exist?
A world without the stock market might look very different. Things may be better in some ways and worse in others. You might not even realize some of the ways the stock market has affected your life, financial prospects, and the overall economy.
What Buying Stock Means
When you buy a share of stock, you are buying a very tiny slice of the underlying business. When the business is making money, typically in a robust economy, your shares should increase in value. This process has been made easy because of the stock market's existence.
Without a bustling stock market, each person wanting to buy an interest in a company might have to transact directly with that company, requiring their attorney and banker, among other professionals. At the very least, the transaction costs would be much higher than they are with today's liquid and the accessible stock market. Additionally, trying to sell your shares without an active stock market would mean finding your buyer for your shares and overseeing it yourself.
Enabling Business Growth
Many businesses have only been able to grow thanks to the money which they have raised by selling their stock to the public. In fact, many of the nation's biggest and most important corporations got past their startup phase by raising millions in the Initial Public Offering (IPO) 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. Additionally, having publicly traded shares makes it easy for other companies to merge with, or acquire businesses, which provides an exit strategy if the company is no longer viable on its own.
After the first sale of the original shares by the companies' owners, the stock is traded freely on the public exchanges. At this moment, shareholders have evolved from an investor—possibly involved in the original funding (IPO) of the business—to a speculator who is gambling that the shares might rise—or fall in the case of a short-seller. In this way, some might argue there is no value added to the economy by trading stocks.
After the initial sale, buying and selling shares on the market does not provide any funds to the underlying corporation. While the value of the stock serves as an indicator of the market value of the company on paper, it doesn't matter to IBM or Apple if their shares rise or drop from a cash flow perspective.
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 the value of their stock. Issuing new shares to raise $10 million becomes much easier if the underlying corporation has a market value of $5 billion rather than $5 million.
The Downsides of Each Scenario
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 ends of the income brackets.
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 company were immune to the downside risk.
The result, especially since the stock market has historically grown over time, is that investors (usually wealthier individuals compared to non-investors) increase their worth. The gap between the haves and the have nots grows wider.
Conversely, however, one could argue that the average person would have little to no access to invest in companies without the existence of the stock market, and would, therefore, miss out on earning a return based on company growth. This lack of access could lead to a much smaller upper class and an almost non-existent middle class.
A nation without a stock market could see more even income levels between the upper and the middle class. However, the overall economy might not be as strong, and many of our major corporations would not exist. For example, consider the benefits of all of the jobs and corporate taxes that would be lost if the nation did not have large employers and goods suppliers such as Walmart, Costco, Apple, Exxon, and Cracker Barrel.