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The stock market is the frontend of the whole system. Companies can issue stock to raise money to fund operations, compensate employees, etc. Companies can also
by ttobbaybbob 7y ago
The stock market is the frontend of the whole system. Companies can issue stock to raise money to fund operations, compensate employees, etc. Companies can also use their stock as collateral to borrow money. The higher the stock price the lower the effective cost raising money.
By being correct about a stock in a trade you end up being rewarded for decreasing the cost of capital of companies that do the most with it.
- ksdale 7y agoI understand how all that works, but the reality is that the number of transactions that actually involve a company giving someone shares in exchange for cash is vanishingly small compared to the total number of stock trades that happen. Some quick Googling indicates that in the first quarter of 2019, startups raised about $30b. Also according to some quick Googling, in 2013, the NYSE did about $170b per DAY of trading. Obviously that $30b number isn't close to all the capital raised by companies in that time period, but neither is the NYSE the only place where stocks are trading hands. The vast, vast majority of transactions do not involve a company raising money. And just a minor quibble, a more accurate stock price doesn't always lower the cost to a particular company of raising money. It makes the market more efficient over all, for sure, but often companies would prefer a less accurate (ie, higher) stock price for the purposes of raising money. Needless to say, I'm not convinced that this kind of volume is necessary to get most of the benefit of the stock market as a price discovery mechanism. I'm not saying anything needs to change, I'm just not sure it's such a huge public good.