Trading activity was never about value creation to begin with.

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

> 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_(...

What exactly are you arguing? That stock based compensation or usage in an acquisition means the stock market isn’t about trading?

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

Companies save cash by paying employees in stock instead of cash (and saving cash is just an indirect way or raising cash, a penny saved is a penny earned etc.) Companies cannot pay employees in stock unless the employees have a way of eventually selling that stock. Employees can only sell stock because a robust secondary market exists for buying and selling stock. Therefore, the continuous trading of stock helps companies raise cash and “create value” even after the IPO.

> In fact outside of an IPO you are not investing into a company, but just trading a piece of a pie that already existed.

This assertion is false. The purchase of shares creates upwards pressure on the stock price, which reduces cost of capital.

When a start-up is privately held, they might raise a round of funding to grow their team. Investors get a piece of the company, the employees get paid, and the company gains an employee at the cost of diluting their equity.

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.

> Trading activity was never about value creation to begin with.

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?

The best reasoning I can come with is:

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?

liquidity creates value by freeing capital to chase new opportunities.

If you buy stock in a public company which does not pay dividends, what are you if not a speculator?

A dividend just reduces the value of the company by x cents per share and pays you x cents per share in cash. It's not "free income" as most people seem to think. It makes more sense to think of it like a buyback.

You are speculating in a company even it pays dividends. There is no guarantee dividends will continue. Are you trying to say there is a difference between a speculator and an investor? If so please explain.

If the company pays dividends, you may purchase a stock with zero expectation that the price of that stock will rise. There may be risk, but some of that risk is that your asset will stop delivering value to you, not soley that other speculators will not be willing to buy that asset from you at a higher price.

You are confusing speculation with growth investment. They are not the same.

Ah, you're right. I had my English vocabulary loaded instead of my investor vocabulary.

Speculators have shorter windows than retail investors looking to store value for long-terms gains. Owning a non-dividend stock in my retirement fund is not equivalent to speculation.

Why does the time frame make a difference?

Because what the market will do between now and next week is pure speculation. Over the next 30 years you can expect value to grow about 7% per year on average.

edit: s/the market/value/

I'm not sure that continuous growth can be reliably predicted over a 30 year span. There is reason to believe that we may need to move away from economic systems dependent on continuous growth. (edit: though I highly suspect this is more than 30 years away.)

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.

Just because the US stock market has worked out in the past century doesn't mean it will continue to reap those types of gains. I you would have invested in the Nikkei 30 years ago, you would still be waiting.

The very act of investing is the act of taking on risk. It's not free money, you are being rewarded for taking on the risk.

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.

Liquidity has to exist before investment can happen, and liquidity only exists because of “speculators”.