5 ms·

> What benefit does the stock market provide to us ? Direct benefit: liquidity - whether you need to buy or to sell, you have a place where you'll find a count

> What benefit does the stock market provide to us ? Direct benefit: liquidity - whether you need to buy or to sell, you have a place where you'll find a counterpart quickly. Indirect benefit: information - just watching the bets lets you have an idea about how much people with skin in the game value things, letting you take better decisions about resources allocation.

cm2187 9y ago
And the benefit of liquidity is to reduce your risk. If you change your mind, need some cash quickly, or even simply want to know what the market thinks your stock is worth, you need liquidity. If you don't have observable and executable prices, you may struggle to find a buyer for that stock when you need it (delaying a home purchase or exposing you to future changes in market sentiment / health of the company) and will have no idea who to trust to tell you how much you should ask when you sell your position.
- marak830 9y ago
  Liquidity, I'm sorry didn't you invest in that company? If you can find a buyer for that percentage, okay cool, but nothing about investing should revolve around if you need liquidity all of a sudden.
  - dagw 9y ago
    nothing about investing should revolve around if you need liquidity The knowledge that I can get out of my investment any time I want at the current market price makes me much more willing to invest in the first place. If I know that it can take several month to get out of an investment or that I have to sell at a discount to get a fast deal then I'm more likely to sit on more of my money in case I need it quickly.
    - Retric 9y ago
      In theory that's a big deal. In practice most people are looking at days to weeks to liquidate stock and that's not a big deal. As your holdings go up, into the billions, it can take months to years to unwind major investments without tanking the price. Further, having ~six months of living expenses outside of the market is considered prudent anyway. However, the reality is if the market disappeared today informal markets would quickly take it's place consider what happens to pre IPO stock.
      - dagw 9y ago
        Even if liquidity in the stock market doesn't matter to you personally, it also allows for others build new 'products' on top of it that you might benefit from. ETFs and Index funds, for example, provide far more benefits to the average investor than access to a liquid stock market. However they wouldn't really exists in their current form (or at the very least be a lot more expensive) without a liquid marked underneath them.
      - matwood 9y ago
        I hope one to one day have enough wealth that it takes months to liquidate my stocks. The number that can’t be liquidated almost instantly is very large. Additionally, IPOs are almost priced incorrrectly, and show the problems with the informal market.
        Retric 9y ago
        I would not nessisarily say they are priced incorrectly, there is a liquidity premium. Also, post IPO there is often a tiny slice of the company on the market combined with a lot of speculation.
        wbl 9y ago
        IPO pricing is deliberate on the part of investment banks to reward some customers.
        cm2187 9y ago
        Actually probably more to ensure that the IPO doesn't fail, i.e. that there is sufficient demand.
  - charlesdm 9y ago
    You clearly haven't invested much then. Investing in the public markets is different to investing in private equity -- the former is generally highly liquid, the latter illiquid. Illiquid investments need to generate higher returns to make up for the fact they're illiquid, in comparison to liquid ones.
marak830 9y ago
The direct I can understand, I want to sell a portion of my business on the bote that I will give that direct portion profit to the holder. How would any of the other trading help my business, or anyone else?
- liotier 9y ago
  Liquidity is correlated to trading volumes - so the more people exchange shares of your company, the quicker you can find a counterpart. Investors accept lower returns if they can get their money back whenever they please, so a liquid investment vehicle is advantaged. Ceteris paribus, volatility is negatively correlated to trading volumes: if your shares are only exchanged twice a week (actual trading volumes for a small company on some exotic exchange) the price variations will inevitably happen in large steps, which does not reassure investors. And if the company is not publicly traded, who knows what the price of the next transaction will be ? A lively market for an investment vehicle opens the possibility of derivatives, which are valuable to investors interested in the company but whose appetite for risk is limited. So if your company's shares trade has derivatives, it makes them more attractive.
- sokoloff 9y ago
  Same reason that a $100 bill is worth more than a $100 gift card to a specific store. The presence of the secondary market makes the initial offering (sales) of shares easier. Imagine company A is making a primary offering (direct sales of shares from the company to an investor), but that those shares do not have a ready secondary market. Imagine company B is making the same primary offering, but there is a deeply liquid secondary market. Company A and Company B are otherwise identical (line of business, revenue, profit, outlook for the future, etc). Investors will much more readily invest in company B.
- eru 9y ago
  The possibility of that trading induces your first buyer to give you a higher price as the first seller. (Similar to how money or even bitcoin is only useful if you can pass it on.)
marak830 9y ago
Direct: I can understand. Indirect: that seems like a losing game. Why would gambling on a companies future ever help anyone(except the lucky?).
- wskinner 9y ago
  Markets aggregate information in a (usually) efficient way. Information is useful to different people in different ways. Just to take one example, if the stock price of a company falls and stays low for a whole, that could reflect some negative future prospects for the company, which traders know about. That could affect my decision to move across the country to work for that company. That is valuable to me. Since you asked for a source, I’ll give you one: pick up any introductory economics textbook.
- technofire 9y ago
  > Why would gambling on a companies future ever help anyone Most transactions in the market are not gambling. Trades happen, yes, but that is because the prospects of companies are continually changing. When it became apparent pretty much everyone would move to Netflix and streaming video, would you want to continue holding Blockbuster stock? No; you would want to sell it. People who simply "gamble" in the market lose money about as often as they gain it, and soon stop. Hedge funds and mutual funds generally try to invest in shares on a longer-term basis rather than continually trading them; trading incurs transaction costs, and if an investment was correct and is generating better-than-benchmark returns there is no reason to sell it. The "day trading" books you might see at your local Barnes and Noble are get-rich-quick books and are not representative of the actual professional investment industry.
  - eru 9y ago
    > [...] would you want to continue holding Blockbuster stock? No; you would want to sell it. For every seller, there's a buyer. The market will settle on a price at which those are evenly matched---even if that's close to zero. You have to offer a good enough price on your Blockbuster stock to find a buyer who thinks it's a good idea. (Unless it's someone who has to cover a short position, those guys are basically forced to buy. But they'll still buy from the seller with the best price.)

cm2187 9y ago

And the benefit of liquidity is to reduce your risk. If you change your mind, need some cash quickly, or even simply want to know what the market thinks your stock is worth, you need liquidity. If you don't have observable and executable prices, you may struggle to find a buyer for that stock when you need it (delaying a home purchase or exposing you to future changes in market sentiment / health of the company) and will have no idea who to trust to tell you how much you should ask when you sell your position.

marak830 9y ago
Liquidity, I'm sorry didn't you invest in that company? If you can find a buyer for that percentage, okay cool, but nothing about investing should revolve around if you need liquidity all of a sudden.
- dagw 9y ago
  nothing about investing should revolve around if you need liquidity The knowledge that I can get out of my investment any time I want at the current market price makes me much more willing to invest in the first place. If I know that it can take several month to get out of an investment or that I have to sell at a discount to get a fast deal then I'm more likely to sit on more of my money in case I need it quickly.
  - Retric 9y ago
    In theory that's a big deal. In practice most people are looking at days to weeks to liquidate stock and that's not a big deal. As your holdings go up, into the billions, it can take months to years to unwind major investments without tanking the price. Further, having ~six months of living expenses outside of the market is considered prudent anyway. However, the reality is if the market disappeared today informal markets would quickly take it's place consider what happens to pre IPO stock.
    - dagw 9y ago
      Even if liquidity in the stock market doesn't matter to you personally, it also allows for others build new 'products' on top of it that you might benefit from. ETFs and Index funds, for example, provide far more benefits to the average investor than access to a liquid stock market. However they wouldn't really exists in their current form (or at the very least be a lot more expensive) without a liquid marked underneath them.
    - matwood 9y ago
      I hope one to one day have enough wealth that it takes months to liquidate my stocks. The number that can’t be liquidated almost instantly is very large. Additionally, IPOs are almost priced incorrrectly, and show the problems with the informal market.
      - Retric 9y ago
        I would not nessisarily say they are priced incorrectly, there is a liquidity premium. Also, post IPO there is often a tiny slice of the company on the market combined with a lot of speculation.
      - wbl 9y ago
        IPO pricing is deliberate on the part of investment banks to reward some customers.
        cm2187 9y ago
        Actually probably more to ensure that the IPO doesn't fail, i.e. that there is sufficient demand.
- charlesdm 9y ago
  You clearly haven't invested much then. Investing in the public markets is different to investing in private equity -- the former is generally highly liquid, the latter illiquid. Illiquid investments need to generate higher returns to make up for the fact they're illiquid, in comparison to liquid ones.

marak830 9y ago

The direct I can understand, I want to sell a portion of my business on the bote that I will give that direct portion profit to the holder. How would any of the other trading help my business, or anyone else?

liotier 9y ago
Liquidity is correlated to trading volumes - so the more people exchange shares of your company, the quicker you can find a counterpart. Investors accept lower returns if they can get their money back whenever they please, so a liquid investment vehicle is advantaged. Ceteris paribus, volatility is negatively correlated to trading volumes: if your shares are only exchanged twice a week (actual trading volumes for a small company on some exotic exchange) the price variations will inevitably happen in large steps, which does not reassure investors. And if the company is not publicly traded, who knows what the price of the next transaction will be ? A lively market for an investment vehicle opens the possibility of derivatives, which are valuable to investors interested in the company but whose appetite for risk is limited. So if your company's shares trade has derivatives, it makes them more attractive.
sokoloff 9y ago
Same reason that a $100 bill is worth more than a $100 gift card to a specific store. The presence of the secondary market makes the initial offering (sales) of shares easier. Imagine company A is making a primary offering (direct sales of shares from the company to an investor), but that those shares do not have a ready secondary market. Imagine company B is making the same primary offering, but there is a deeply liquid secondary market. Company A and Company B are otherwise identical (line of business, revenue, profit, outlook for the future, etc). Investors will much more readily invest in company B.
eru 9y ago
The possibility of that trading induces your first buyer to give you a higher price as the first seller. (Similar to how money or even bitcoin is only useful if you can pass it on.)

marak830 9y ago

Direct: I can understand. Indirect: that seems like a losing game. Why would gambling on a companies future ever help anyone(except the lucky?).

wskinner 9y ago
Markets aggregate information in a (usually) efficient way. Information is useful to different people in different ways. Just to take one example, if the stock price of a company falls and stays low for a whole, that could reflect some negative future prospects for the company, which traders know about. That could affect my decision to move across the country to work for that company. That is valuable to me. Since you asked for a source, I’ll give you one: pick up any introductory economics textbook.
technofire 9y ago
> Why would gambling on a companies future ever help anyone Most transactions in the market are not gambling. Trades happen, yes, but that is because the prospects of companies are continually changing. When it became apparent pretty much everyone would move to Netflix and streaming video, would you want to continue holding Blockbuster stock? No; you would want to sell it. People who simply "gamble" in the market lose money about as often as they gain it, and soon stop. Hedge funds and mutual funds generally try to invest in shares on a longer-term basis rather than continually trading them; trading incurs transaction costs, and if an investment was correct and is generating better-than-benchmark returns there is no reason to sell it. The "day trading" books you might see at your local Barnes and Noble are get-rich-quick books and are not representative of the actual professional investment industry.
- eru 9y ago
  > [...] would you want to continue holding Blockbuster stock? No; you would want to sell it. For every seller, there's a buyer. The market will settle on a price at which those are evenly matched---even if that's close to zero. You have to offer a good enough price on your Blockbuster stock to find a buyer who thinks it's a good idea. (Unless it's someone who has to cover a short position, those guys are basically forced to buy. But they'll still buy from the seller with the best price.)