What is the Stock Market?

It may seem unusual explaining the existence of the stock market. The intention is to outline the basics of the stock exchange to remind investors why they are participating.

Wikipedia summarizes it well. “The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace.”

Many investors fail to achieve their desired returns because they “play” the stock market, investing in tickers on a screen. It’s treated as a casino, with speculation driving many investment decisions. Let’s bring it back to the question “Why does the stock exchange exist?”. This can help in developing Investment philosophies that view market participation as a necessity to the economy and the businesses driving it.

The stock market is a marketplace similar to a “Sunday Market” where everyone gathers to sell their goods (🍩Jam Doughnuts) to those passing by. The marketplace “Stock Market” is facilitated by the “Stock Exchanges” that support them. Think of the stock exchange like the grounds that Sunday markets operate on, with all the stalls and layouts that can accommodate a large group of shoppers in an organized fashion.

The stock exchange gives businesses the ability to sell stock and bonds to the general public. The stock market is a network, one of the first and best examples of a “Network effect”. The more investors (shareholders) that flock to an exchange, the more companies list, drawing even more investors.

The network organises all the trading activity and monitors what is bought and sold and ownership. At its core, it facilitates the flow of money between companies and investors.

Why does the Stock Market exist?

The Stock Market serves several important purposes, with facilitation as a guiding principle. They are:

Raising Capital: The main reason for the stock exchange is to help companies raise capital to operate and expand. This can be done by issuing new shares (equity) or through taking on debt (bondholders). By issuing shares to the public, a company can raise capital without taking on debt.

Transparency and Accountability: The Stock market promotes corporate governance and transparency in reporting, accounting standards, and regulations. This provides investors with real-time information to guide their investment decisions and protection against fraud.

Liquidity: The stock market efficiently facilitates the interaction of buyers and sellers. This provides liquidity and making it easier for shareholders to buy and sell securities.

Valuation of Assets: The exchange of shares helps in determining the price of assets based on the interactions of buyers and sellers, providing a real-time value for a business.

Removal of Friction: The established marketplace removes the obstacles for businesses seeking capital and shareholders looking for investments, facilitating transactions and reducing time and cost.

Unlocking of Capital: The existence of a marketplace allows individuals to invest their capital rather than keeping it in a bank, unlocking capital and contributing to the flow of money, which benefits the economy.

These are the primary reasons for a public marketplace. Each reason can be broken down further, but the principle remains the same from an investment perspective. All of this is a driver of Capitalism. Investors invest in the stock market because of these reasons. The outcome of this is to generate wealth and make a profit for shareholders.

In Summary…

The stock market also acts as a ledger of who owns what and how much profit they are entitled to based on ownership. Investors who place their capital in a business and become shareholders are expecting to be rewarded for their support of that business. Otherwise, why invest?

The byproduct of a successful and thriving stock market is the growth of the business and the profit it generates for its owners, both equity and debt holders.

By adhering to the principles of investing, I believe it prepares investors with the right mindset of why they are investing, rather than just saying “I want to get rich” or “I bought this company because I think it will go up.”

When we discuss creating a philosophy, we touch on creating a guiding belief about markets. I think it is helpful long-term for investors to reprioritise how they think about markets in general. They exist to facilitate all the reasons stated above, and as a result, reward the shareholders in the process. Not to get rich quickly.

I believe this empowers investors allowing them to back endeavours and businesses that they believe in and want to support, as opposed to just participating because it can create wealth. We have to think like a business owner, capitalist, and investor, not just mimic the characteristics. Investors are apart of something bigger than a quick buck. You are entrusting your hard-earned money to companies that can provide you a return.

Shareholders play the most important role in keeping the heart of the stock market and economy pumping. Like the Sunday Market, if there is no one passing by, there would be no marketplace.

🖼️ What is the cover image? The illustration shows how the original stock exchanges worked with buying and selling of stocks.