Imagine a world without a stock market. Things might be better in some ways and worse in others. You may not even realize some of the ways the stock market has affected your life, financial prospects, and the overall economy.
You would have to buy and sell your own stocks
When you buy a stock, you are purchasing a tiny piece of the underlying company. When the company is profitable, usually in a strong economy, the value of your shares should increase. This process is facilitated by the existence of a stock market.
Without an active stock market, anyone wanting to buy a share in a company might have to deal directly with that company, requiring the involvement of a lawyer, banker, and other professionals. At the very least, transaction costs would be much higher than they are in the currently liquid and accessible stock market.
Trying to sell your shares without an active stock market would mean searching for a buyer for your shares and overseeing the transaction process yourself.
It may be difficult to obtain business funding
Many companies have only been able to grow thanks to the money they raised by selling their shares to the public. In fact, many of the largest and most important companies in the country received their initial funding through an initial public offering (IPO) at some point in their lifecycle.
After that, when companies need to raise more funds in the future, public markets provide an easy way for companies to obtain that financing. Having publicly listed shares makes it easy for other companies to merge with or acquire them, providing an exit strategy if the company can no longer survive on its own.
Business growth may be challenging
After the original shares are sold by the company owners, the shares trade freely on public exchanges. Shareholders then evolve from being investors – perhaps they participated in the original funding of the company (IPO) – into speculators betting on stock price increases (or decreases in the case of short sellers). In this way, some might argue that there is no added value to the economy from trading shares.
After the initial sale, buying and selling shares in the market does not provide any funds to the underlying company. While the stock’s value serves as an indicator of the company’s market value on paper, it does not matter for companies like IBM or Apple whether their stocks rise or fall from a cash flow perspective.
Of course, the higher the stock price, the greater the company’s value, and vice versa. Therefore, if a company wishes to raise more funds, it can do so more easily the higher its stock price is.
Drawbacks of the stock market
The biggest drawback of the stock market is that it generates income inequality. When major indices (like the Dow Jones Industrial Average) rise, individuals who own stocks see an increase in their net worth. This opportunity is missed by those who do not participate in the stock market (typically, individuals and families in lower income brackets).
Of course, investment can go both ways. Consider all the money lost in a stock market crash – individuals who were not shareholders in any company were insulated from the downside risk.
The result, especially given that the stock market has historically grown over time, is that investors (typically wealthy individuals, compared to non-investors) increase their wealth. The gap between the rich and the poor widens.
On the other hand, the average person might argue that they have little or no ability to invest in companies without a stock market and that they therefore miss out on the chance to receive investment returns based on company growth. This lack of access can lead to the existence of a much smaller upper class and a virtually non-existent middle class.
Conclusion
It may
Some people believe that income will be more equal between the upper class and the middle class in a country without a stock market. However, the overall economy may not be strong, and many of our major companies may not exist, at least as we know them. For example, consider the benefits of all the jobs and corporate taxes that would be lost if the country did not have major employers and major goods suppliers like Walmart, Costco, Apple, Exxon, and Cracker Barrel.
Frequently Asked Questions (FAQs)
Since when has the stock market existed?
One of the earliest primary markets for securities is the secondary market where shares of the Dutch East India Company were traded back in 1602. The American stock market can be traced back to the late 18th century. In the 1830s, brokers commonly traded “curbstone” stocks in the streets of New York City. This system moved indoors in the 1920s and evolved into the current stock market.
What will happen to an employer’s stock if the stock market declines?
If the overall stock market declines, the price of an employer’s stock might drop or it might not. Stock prices take many factors into account, and the broader market environment is just one of those factors.
When the stock market falls, it can make it difficult for the price of an employer’s stock to rise. However, a market decline does not necessarily mean that the price of an employer’s stock will drop.
Source: https://www.thebalancemoney.com/what-if-the-stock-market-didn-t-exist-2637105
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