A world without the stock market might look very different.Things might be better in some ways and worse in others. You might not even realize some of the ways the stock market has affected your life, financial prospects, and the overall economy.
Key Takeaways
- Without a stock market, purchasing shares directly from a company or selling directly to new investors would be more complex and expensive.
- Business growth would be more difficult if companies could not have an initial public offering or issue new shares to raise money.
- Eliminating the stock market would likely reduce income inequality between those who can invest to grow their wealth and those who cannot.
- A country without a stock market might have more even income levels between classes but an overall weaker economy with fewer major corporations.
You'd Have to Buy and Sell Your Own Stock
When you buy a share of stock, you are buying a very tiny slice of the underlying business.When the business is making money, typically in a robust economy, your shares should increase in value. This process has been made easy because of the stock market's existence.
Without a bustling stock market, each person wanting to buy an interest in a company might have to transact directly with that company, requiring their attorney and banker, among other professionals. At the very least, the transaction costs would be much higher than they are with today's liquid and accessible stock market.
Note
Trying to sell your shares without an active stock market would mean finding your own buyer for your shares and overseeing the exchange yourself.
Business Funding Might Not Be Easy
Many businesses have only been able to grow as a result of the money they have raised by selling their stock to the public.In fact, many of the nation's biggest and most important corporations got past their startup phase by raising millions in the initial public offering (IPO) stage of their lifecycle.
Subsequently, as companies need to raise more money down the line, the public markets provide an easy way for corporations to get that funding.Having publicly traded shares makes it easy for other companies to merge with or acquire businesses, which provides an exit strategy if the company is no longer viable on its own.
Business Growth Would Be Tougher
After the first sale of the original shares by a company's owners, the stock is traded freely on the public exchanges.Shareholders then evolve from being investors—possibly involved in the original funding (IPO) of the business—to speculators who are gambling that the shares might rise (or fall in the case of short-sellers).In that way, some might argue that there is no value added to the economy by trading stocks.
After the initial sale, buying and selling shares on the market does not provide any funds to the underlying corporation.While the value of the stock serves as an indicator of the market value of the company on paper, it doesn't matter to IBM or Apple whether their shares rise or drop, from a cash-flow perspective.
Of course, the greater the value of the shares, the greater the value of the company, and vice versa. Thus, if a business wants to raise more money, it can do so more easily, the higher the value of their stock.
Note
Issuing new shares to raise $10 million becomes much easier if the underlying corporation has a market value of $5 billion rather than $5 million.
Stock Market Drawbacks
The greatest downside to the stock market is that it engenders income inequality.When the major indexes (such as the Dow Jones Industrial Average) climb, individuals who own shares typically see their net worth rise.Those who are not involved with the stock market (usually, people and families in the lower income brackets) miss out in that case.
Of course, investing can go both ways.Think of all the money lost in a stock market crash—people who were not shareholders of any company were immune to the downside risk.
The result, especially since the stock market has historically grown over time, is that investors (usually wealthier individuals, compared to non-investors) increase their worth.The gap between the haves and the have-nots grows wider.
Note
Conversely, however, one could argue that the average person would have little to no ability to invest in companies without the existence of the stock market and that they would, therefore, miss out on earning a return based on a company's growth. Such a lack of access could lead to a much smaller upper class and an almost non-existent middle class.
The Bottom Line
A nation without a stock market could see more even income levels between the upper and the middle class.However, the overall economy might not be as strong, and many of our major corporations would not exist, at least not as we know them.For example, consider the benefits of all of the jobs and corporate taxes that would be lost if the nation did not have large employers and goods suppliers such as Walmart, Costco, Apple, Exxon, and Cracker Barrel.
Frequently Asked Questions (FAQs)
How long has the stock market existed?
One of the oldest precursors to modern securities markets is the secondary market that traded shares of the Dutch East India Company in 1602. The U.S. stock market can be traced back to the late 18th century. By the 1830s, "curbstone brokers" commonly traded stocks on the streets of New York City. This system moved indoors in the 1920s and evolved into the current stock market.
What will happen to my employer's stock if the stock market goes down?
If the broader stock market is going down, your employer's stock price may or may not go down. Stock prices take many factors into account, and the broader market environment is just one of those factors.
When the stock market goes down, that can make it more difficult for your employer's stock to go up. However, just because the market is going down, that doesn't necessarily mean your employer's stock will go down.
