The reality is that the stock markets do not do the job of supplying businesses with capital anymore. So why are they used as savings mediums when they serve no further social or economic purpose?
Imagine there was no stock market. Any investment must thus be held forever. Anyone who invested in IBM back in the day would still hold those IBM shares. They’d be hugely wealthy of course, but couldn’t sell off some portion of their IBM stock because there is no market in secondary stock.
Well, no, not really, because anyone who invested in IBM back in the day, directly with new stock issues, is now dead. Their estate could not pay any tax upon that stock value, because the stock could not be liquidated to pay the value. Actually, contrary to the above para, they’d not be rich and there would be no inheritance tax to pay either. For there is no secondary market. It’s not possible to sell IBM stock thus there is no value to it.
Given this world what is the required return to invest in a new stock issue? Higher than today’s perhaps? The cost of capital is higher, society is poorer.
This is even before we get to the idea that perhaps savers would like to diversify their portfolios. Or that there are people for whom a stream of income in the form of dividends is a good idea.
Or, even, the basic savings problem itself. I – to use I to mean the rational human being – know that I will work for some portion of my life. I damn well hope that I’ll have some decades of Golden Years in which I will be consuming those savings. I want to be able to consume the capital of those savings of course, not just the income from them. As the lifetime savings hypothesis insists, I want to smooth my income over my life,. That does mean being able to consume the saved capital in my retirement. But how can I consume the capital if I cannot sell any portion of it? There is no secondary market? I would only be able to consume the income from my savings. At death, my total savings would be whatever my peak amount of savings was.
For I’d not have been able to, in the absence of a market in secondary savings, sell any of my capital.
Hey, pretty good for my inheritors, obviously. But then as the Senior Lecturer would insist, we shouldn’t be allowed to pass on capital anyway, should we?
Sigh. The fool still can’t grasp that the point of a stock market is to allow people to sell investments.