Why Does the Stock Market Exist?

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Why Does the Stock Market Exist?

By Michael Tibbits, YouCanTrade Content Specialist

To help companies raise capital
The main reason the stock market exists is to help companies raise capital as an alternative to borrowing funds. If we break it down, there are two ways a company can raise money to perform its operations. The first way is by borrowing money. This can either be done by borrowing from the bank or issuing debt securities, such as corporate bonds, to raise money. However, borrowing funds means having to repay loans with interest, which can get costly over time.

Enter the stock market.

As an alternative to issuing debt, or borrowing money, companies can choose to issue stock and sell shares of their company. The stock market itself is simply a place to publicly match buyers and sellers. Companies sell off a percentage of their companies to raise capital. When a company first issues stock to the public, it does so through what is called an initial public offering (IPO). Capital raised from an IPO can help companies expand its operations.

To help create personal wealth
One of the reasons the stock market exists is to help generate personal wealth. Saving money can only get you so far. The stock market provides a way for you to invest your capital to earn a share of a company’s profits. Investing in stocks can reward you in two ways.

  1. Stock Price Appreciation – The price of the stock increases after you buy it.
  2. Dividends – A distribution of the excess earnings amongst shareholders of record, which is usually sent out as a check or electronically transferred into the stockholder’s brokerage account.

By having the ability to reinvest dividends, you can compound the interest and grow an account exponentially over time.

To help measure the state of our economy
Even before the invention of the internet, the stock market has always been one of the most available resources for people to invest money in. Even economists look to the stock market to analyze the past performance of investments and spending, which helps them in the creation of new economic policies. The United States Treasury and The Federal Reserve, who stimulate the economy using fiscal and monetary policies, look to the stock market constantly to gauge economic spending. The economy and the stock market are very closely linked, and it is often said that the stock market is the economy’s barometer.

To help you retire
Whether you realize it or not, the money you contribute towards your retirement account is being invested somewhere… any idea where? That’s right folks, your retirement is likely invested in the stock market! Or, at least a good chunk of it is. Normally, contributions taken out of your paycheck are invested in mutual funds. Mutual funds typically hold stocks, or a balance of stocks, and fixed income investments.

To help Uncle Sam
Unless you qualify for special tax treatment, sales proceeds from trade-related activities are taxed as capital gains. More investors in the stock market means more money the U.S. government can collect in taxes for infrastructure, education and other social programs.

The stock market is so much more than a means to make money. In addition to providing a convenient way for companies to raise capital and for individuals to increase wealth, the stock market helps keep a check on corporate regulation and increases the economic growth and prosperity of the nation.

 

2020-12-03T14:14:14-05:00
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