Arqane said:
I definitely wouldn't go as far as saying that. Supposedly most of the stocks are purchased with cash that was gained elsewhere and exchanged for that stock. For any money that is loaned for the purpose that doesn't exist, that's equivalent to printing money. You could try to say that the money is being used to provide additional goods and services by the company, but that's a very weak link at best (and part of why I don't like the stock market). The added money has nothing to do with the business itself unless it borrows money against the inflated cost, or does a stock buyback. Otherwise the transaction is completely between two outside parties that are usually determining value by emotion and not even the underlying numbers of the business.
I'd be interested in hearing a counterpoint, though.
Hmm I beg to differ. The way I see it, stocks create wealth in a similar way that banks do. Now how it works with banks is quite simple: they reduce uncertainty/risk. I like to think of it as an interaction between 3 parties: the lender has too much money. He could just let the money sit there and hoard it, of course. But that's not very useful. Instead, he could help himself and others by sharing that money, provided he gets the money back along with the interest. Otherwise there's no incentive to do so. So we discover investing, which is just sharing done right.
Next, we have the borrower who needs money but doesn't have it. Why he needs the money is a bit of a complicated topic but in the best case, he needs the money to try out a new idea, which will lead to increased efficiency and better functioning of the economy. Now, he could wait until he's saved enough money by himself to test the idea but that might take a very long time. Instead, what he can do is borrow the needed money from someone who has too much of it.
Ideally, this is a win-win for both parties. The lender receives a monetary reward for sharing his money and the borrower saves time by having the money now instead of decades later.
However, we do have uncertainty. What if the idea is bad and the borrower is unable to pay? The lender loses his money and thus any incentive to share it, encouraging hoarding. Instead, what the lender could do is spread out his risk. Instead of lending all his money to a single party, he could lend small fractions of it to different borrowers. That way, the risk of all of them defaulting is quite low. Of course, the more borrowers, the better. But depending on how much money the lender has, he can only divide it into so many pieces before the pieces become impractical.
This is where banks come in. By acting as a buffer between the lender and the borrower, they reduce the lender's risk to almost zero. The lender would never have been able to do this on his own. It also saves him a lot of time and effort on having to find the right borrowers and keeping track of his earnings/losses. This is also better for the borrower because it almost guarantees him a supply of needed money. He also saves time and effort on finding a willing lender. Overall, everyone wins.
Sidenote: usually, middlemen just increase inefficiency and thus should be eliminated but banking seems to be an exception where the middleman actually increases efficiency.
Stocks function in a similar way. By raising revenue for the company, the company can now use this revenue to expand and increase efficiency, thus benefitting themselves and the investors in the process. You're basically betting that the money you've given to the company will be used for fiscal gain. Now there's no guarantee that this will happen, but in general, companies are motivated by self-interest too. Hence they have an incentive to use the stock revenue to increase their profits. Stocks are betting done right. Ultimately there are no guarantees and it's all probabilistic. However, 90/10 odds are much better than 50/50 for all parties involved imo
Sorry about the lengthy reply. I wanted to be as thorough as possible and help you see things from my perspective.