I am having problem understanding how the “economy” or “market” is just a perception. Any other profession contributes mostly physically and mentally to boost the economy: doctor, engineer, scientist, business, police, army, fashion, Bollywood industry etc etc. Q 1) what is the contribution of people who does intraday who gains a lots of money or looses ? 2) why should perception (speculation) removes and gains money from the market, without actually seeing the P&L of the company ? For me its mostly a professional gambling job. In no other profession people do that ie: think if engineer doctor starts doing that what will happen. So many other questions.
IN NOWAY I HATE ANYONE, PLEASE DONT TAKE MY QUESTION AS THAT, I JUST WANT TO UNDERSTAND THE SYSTEM.
An investor (long term) is also very important for economic growth. Companies do & increase their businesses with the investors’ money. In every sector an investor (self or from others) is essentially required.
Speculation is a process of transferring money from the loser’s pocket to the winner’s pocket. Speculators trade among themselves & provides liquidity to the market. It is a zero sum game.
At the end only investors’ money goes to the company.
Secondary markets exist for Price discovery. That’s the base of economics 101.
Imagine any physical goods market where price discovery can happen on a national /international scale. Won’t that be extremely efficient? But ofcourse this is mostly not possible in physical goods markets (except in commodity markets and thats why commodity prices are mostly market driven rather than actual “mandi” driven). In financial markets, that happens everyday. And what we, as traders and investors do here is to discover a fair price for equity of a company (read any good corporate finance book and you will get to know the concept of cost of equity).
In my opinion
Intra day/short term traders are like distributors. They act like a mediator in between.
E.g., Assume a Super Market store what they does is buy the groceries from one and sells to others.
They add some margin to get profit. If the stock goes as per plan they will be in profit (Target hit).
If Stock is not moving as per plan they offer discount and get rid of it (Stop hit).
Like Super market paying GST here Traders paying STT & GST.
Like Super market offering jobs to people here traders are helping the brokers to pay salaries.
In this world every one is a gambler in my opinion every company also. They spend most of their profits on R&D to innovate new products by assuming they can make even more profits. Is it not gambling ?
Oh sorry they are working as per their strategy so it is not gambling right ?
Then here too some one trades Intra day/Short term as per the strategy it is not gambling.
Yes I agree many researchers are working to find the cure for COVID-19 to save the humans.
It is a ethical view.
But in the above post my point is in the form of money. They spent money on every experiment to find the cure but most of them fail and very few give positive results.
It is a question I struggled with for a lot of years. Finally, this is how I came to terms with it:
What-if, we do not have secondary markets and traders. Would that be a problem to anyone.
The premise is, IF there was no value added by traders and markets, it should not inconvenience anyone.
The following problems would occur with if no markets:
You will be stuck in your investment(through primary markets) and you will not be able to exit out of your investment. So secondary market is needed.
Traders are there to take your assets/stock at a price and so they help in taking the other side. ie Buy whenever you want Sell even in extreme conditions improve. They would in turn liquidate that at an appropriate time by virtue of being able to hold on till the conditions improve.
I am aware @vishnux already mentioned it elegantly in one word. it is liquidity. . Please treat the above only as building from first principles.
If there were no stocks traded, there would be no appreciation of one’s investment, other than what some authority fixed, which would be notional. How true would that be? How do I get my returns ? So, who would invest in a company?
Not unpopular - but I think an important question.
If the markets are going up, it creates wealth effect so that people spend more in real economy. Similarly when its going down, people spend less. Its imporant in a country like US where 60% of population has exposure to Equity comapred to 3% in India. Still, for us - who are watching this, its a great signal to spend or not spend.