Personal Finance Friday - Why is the Stock Market Important?

So last week was a very high level review of what a stock market is. But why are stock markets important or even a good thing? People today have a generally dim view of capitalism (as they drink their Starbucks, watch their Netflix, drive in their cars, on their weekends filled with leisure, lol), but stock markets, which are big component of modern capitalism, can be a really great tool for economic progress.

As was mentioned before, stocks represent the ownership in a company. Over time as a company grows they need more money. A company can either borrow money, generate it from its operations, or issue more shares in the company to help them grow. Lets concentrate on that last bit.

When a company issues more shares, its called a secondary offering. This means that all of the other people who own the company now own a little less which is called delusion. So if I own 50 of 100 shares and had 50% of a business, and that company now issues 100 more shares, I only own 50 of 200 shares, or 25% of the business. Which sounds like a bad thing right? Well it could be but if that company has opportunities to grow and use that money productively, that 25% could be worth more over time than the original 50%.

All of this is what is called having access to the Capital markets... Which is kind of where the word Capitalism comes from! By being able to gain additional resources or "capital" from the outside world, a business can survive, or possibly grown much faster. In the past this has lead to companies investing in new technology, building out new infrastructure and creating new products. This means new factories get built, new data centers, new cool things are made, new apps are released! People get hired to do these new things, those people have income that they then spend on other things that other people are building and need capital for! In the ideal circumstances its a virtuous cycle that creates economic growth. It doesn't always work that way, but over the last couple hundred years the trend as we can all look around (and read a history book to compare to) and attest to has been towards growth and prosperity.