What is the purpose of a stock market?

Before there was a stock market, there were stock companies.

A stock company allows individuals to pool their money to create an organization to operate and grow.  Stock is used to determine how much a person owns of a company.  Owning a stock does not necessarily create wealth.  Wealth creation can only occur if the stock can be sold to someone else who is willing to pay you more for it than what you originally paid.  This led to the creation of a market for people who owned shares in stock companies.

A stock market has two functions.  First, it allows the owners of stock to sell their ownership interest easily and quickly.  Second, it also allows people who would like to be owners to buy an ownership interest quickly and easily.  Now even people who do not have substantial financial resources can participate in the growth in value of large enterprises.

For example, the founders of Apple were able to raise money for their company by selling their shares of Apple stock to people who were willing to bet that the company would be successful.  That was 1976.  In 1980 the shares of Apple were first allowed to be publicly traded.  As a result, the founding shareholders were able to profit from their original investment and the company itself raised millions of dollars that it could invest in growth.  It also allowed people who did not personally know the founders to become partial owners and benefit from the company’s growth.  The stock market allowed people who believed in Apple computers to bet on the company’s future, and also provided them with a ready market for their shares if they needed to sell or decided they no longer believed in the company’s future.

The bottom line is that the stock market creates liquidity.  Without liquidity it becomes much harder for a company to raise the capital it needs to grow in a modern economy.