Author Topic: Does buying stocks help the economy?  (Read 1529 times)

dragonwalker

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Does buying stocks help the economy?
« on: July 18, 2020, 10:34:48 PM »
I was thinking about this question as I was listening to news about policy makers doing their best to make sure consumer spending doesn't fall during COVID and cause a domino effect of other issues. My initial thought was that it does but I'm not sure of the precise mechanism it does. My personal spending during this period had definitely dropped but it wasn't that high to begin with. By stocks I'm also including ETFs and index funds as well. Not sure how the purchase of options contract helps, hurts, or has no impact on the real economy. 

vand

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Re: Does buying stocks help the economy?
« Reply #1 on: July 19, 2020, 02:40:41 AM »
In short, yes, I do believe that. With the caveat that buyers (and sellers) are largely acting rationally and the market is therefore roughly efficient.

Even if all you do is passively invest in an S&P index fund you are still making the decision to allocate a part of your income into companies, thereby participating in the pricing and future return of those companies.

In participating in capital markets you are contributing to price discovery action that leads to profit and loss signals that shape efficient capital allocation and is the quintessential defining feature of a capitalist system. 

Buffaloski Boris

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Re: Does buying stocks help the economy?
« Reply #2 on: July 19, 2020, 06:55:52 AM »
Yes. But who owns the stocks is important. Unfortunately, stock ownership in the US is increasingly concentrated in the hands of the already wealthy which just exacerbates wealth inequality. If we want something approaching a UBI, expanding stock ownership is a great way to indirectly accomplish that.

ctuser1

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Re: Does buying stocks help the economy?
« Reply #3 on: July 19, 2020, 10:13:26 AM »
Stock market buy/sell -> liquidity.

Liquid stock market, in the US seems to have a strong forward looking correlation, with a 2-3 month lag, with M1/M2 money velocity (https://fred.stlouisfed.org/categories/32242).

Money velocity is absolutely critical for better functioning of the economy.

Note: the above relationship is an empirically observed one, and as far as I understand (which is rather limited), I can’t think of any fundamental reason stock markets should always correlate positively with money velocity. Maybe someone who understands more can add more flavor to the above statement(s).

MilesTeg

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Re: Does buying stocks help the economy?
« Reply #4 on: July 19, 2020, 11:06:46 AM »
I was thinking about this question as I was listening to news about policy makers doing their best to make sure consumer spending doesn't fall during COVID and cause a domino effect of other issues. My initial thought was that it does but I'm not sure of the precise mechanism it does. My personal spending during this period had definitely dropped but it wasn't that high to begin with. By stocks I'm also including ETFs and index funds as well. Not sure how the purchase of options contract helps, hurts, or has no impact on the real economy.

Sometimes, not always.

Unless you are buying an IPO, you are not directly putting money into the company. However, buying shares, thus creating demand, can help raise the stock price. A higher stock price allows the company to perform a supplemental offering (selling more shares) to raise more capital based on the current market price of the stock. It can also give the company financial leverage for loans and other financial needs. This is a supply side economic activity.

But, by far the largest impact you can have on the economy is by buying goods and services. Economic growth is driven by demand, not supply. No matter what Ronnie Raygun told you =P




The_Big_H

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Re: Does buying stocks help the economy?
« Reply #5 on: July 19, 2020, 05:55:03 PM »
I was thinking about this question as I was listening to news about policy makers doing their best to make sure consumer spending doesn't fall during COVID and cause a domino effect of other issues. My initial thought was that it does but I'm not sure of the precise mechanism it does. My personal spending during this period had definitely dropped but it wasn't that high to begin with. By stocks I'm also including ETFs and index funds as well. Not sure how the purchase of options contract helps, hurts, or has no impact on the real economy.

Sometimes, not always.

Unless you are buying an IPO, you are not directly putting money into the company. However, buying shares, thus creating demand, can help raise the stock price. A higher stock price allows the company to perform a supplemental offering (selling more shares) to raise more capital based on the current market price of the stock. It can also give the company financial leverage for loans and other financial needs. This is a supply side economic activity.

But, by far the largest impact you can have on the economy is by buying goods and services. Economic growth is driven by demand, not supply. No matter what Ronnie Raygun told you =P

Why does “direct” change the characteristic.  Stocks bought on the secondary market (basically all of them) contribute just as much.

Buying a “used” house contributes to the economy the same as buying a new one.
Yes you are not directly financing the house builders wages but you are freeing up the seller to go do something else with the money. 

Same when you buy a stock.

shinn497

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Re: Does buying stocks help the economy?
« Reply #6 on: July 20, 2020, 12:17:34 AM »
You finance companies by buying stocks, even post IPO. Companies can always issue new shares to raise capital, when you buy stocks, you raise their share price and make this process easier for them.

I think "helping the economy" however is more the position you are in. If you are buying stocks with debt than not really, as you have not net produced anything. You have just made the market more liquid at the expense of it being more volatile. However, if you are in a good position and take the earnings you make and invest it, you are giving your wealth to companies to make better products.

As for market efficiency. The market is more than efficient enough. Even if you buy index funds, they represent very little trading volume. So when you invest in them, enough people are doing enough research to allocate that money accordingly. You need not do the same research yourself to do so. So you are not required to research companies to earn a return or to help the economy. The caveat is you are taking and appropriate level of risk that successful active investors can reduce.

The notion that you need to buy goods and services to help the economy is false. You vote with your dollars. If you are covering your needs and even wants, than you are sending the signal into the market to produce these goods and services. However, if you are satisfied and you invest, than you are sending another signal into the market to improve your goods and services. By telling companies to improve goods and services, you are making future goods and services cheapers. Theoretically you could meaningfully change the course of our economy this way. Realistically your wealth won't do this however.

But if you look at someone that is wealthy, like Bezos. He is using his investments to improve space travel and cloud computing. Musk improved Space Travel and electric cars. Investment does, in the long run, and in aggregate, produce better goods and services.


ChpBstrd

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Re: Does buying stocks help the economy?
« Reply #7 on: July 28, 2020, 09:50:24 AM »
I don't think buying stocks helps the economy. For you to buy them someone else has to sell them. Until something tangible is created all this trading is just a game of symbols. Stock owners like us are all rent-seekers. We seek to seize control of an income stream produced by other people's efforts instead of working ourselves. Our capture of the rights to corporate income does not produce widgets or widget services - the workers do. Retirement is the transition from being a worker to being a rentier, except perhaps for those who spend down a pile of cash for the remainder of their lives.

The one impact I can think of is the "wealth effect" whereby you are likely to spend more when your stocks are trading at high prices and less when their prices have fallen. This is one reason I'm wary of widespread stock ownership. It's very pro-cyclical. In a world of widespread stock ownership, a stock price correction in itself would cause consumer spending to drop due to the wealth effect.

ctuser1

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Re: Does buying stocks help the economy?
« Reply #8 on: July 28, 2020, 11:05:20 AM »
I don't think buying stocks helps the economy. For you to buy them someone else has to sell them. Until something tangible is created all this trading is just a game of symbols. Stock owners like us are all rent-seekers. We seek to seize control of an income stream produced by other people's efforts instead of working ourselves. Our capture of the rights to corporate income does not produce widgets or widget services - the workers do.

The liquidity provided to the market by our buying activity helps the economy.

When you buy the stock of a company, thereby potentially increasing the value of the stock, you potentially help pay for the RSU/ESPP part of the salary of a worker.

But, biggest of all, the presence of a liquid market where *anyone* can become an owner itself has many societal benefits.

Because of the above I don't quite buy the assertion that to RE is to become a rentier.
(There is, of course, the additional factor that you add value to the economy as a consumer and also - hopefully - intangible value as a community member.) 

PDXTabs

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Re: Does buying stocks help the economy?
« Reply #9 on: July 28, 2020, 11:16:51 AM »
You finance companies by buying stocks, even post IPO. Companies can always issue new shares to raise capital, when you buy stocks, you raise their share price and make this process easier for them.

Also, stock issued as compensation is usually created with the stroke of a pen. Not that I think that buying existing stock in existing companies is all that beneficial to "the economy." I buy stocks for me. If I wanted to help the economy I would buy corporate bonds.

ChpBstrd

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Re: Does buying stocks help the economy?
« Reply #10 on: July 28, 2020, 09:58:06 PM »
I don't think buying stocks helps the economy. For you to buy them someone else has to sell them. Until something tangible is created all this trading is just a game of symbols. Stock owners like us are all rent-seekers. We seek to seize control of an income stream produced by other people's efforts instead of working ourselves. Our capture of the rights to corporate income does not produce widgets or widget services - the workers do.

The liquidity provided to the market by our buying activity helps the economy.

When you buy the stock of a company, thereby potentially increasing the value of the stock, you potentially help pay for the RSU/ESPP part of the salary of a worker.

But, biggest of all, the presence of a liquid market where *anyone* can become an owner itself has many societal benefits.

Because of the above I don't quite buy the assertion that to RE is to become a rentier.
(There is, of course, the additional factor that you add value to the economy as a consumer and also - hopefully - intangible value as a community member.)

I think the question is how does "liquidity" "help the economy?" Certainly a lack of liquidity would prevent the formation of new firms, hamstring their expansion, cut off investment in new products and tech, etc. At liquidity = 0 we would be living in a highly inefficient barter economy. Firms obtain cash through share offerings and debt offerings. So yes, if you buy into an IPO or debt offering, you are handing over your money for productive use.

However, the percentage of stock trades that meet that definition is probably less than 0.0001%. What is actually happening on a daily basis is people are buying and selling ownership tokens amongst themselves. To buy stock in the market and say I provided liquidity for a company is like buying a 30 year old house and saying I built a house. No, I traded cash for a pre-existing asset. The builders got nothing from me. It's also a stretch to be a day trader and say "I provided liquidity for a company" as if day trading a stock were some kind of banking service beneficial to the firm whose stock was swapped amongst parties unrelated to the firm.

Of course, any asset would have a much lower price if it could never be sold in a secondary market. Imagine buying a house or a car, and having to sign a contract that it could never ever be sold. You'd pay a bit less for the asset due to that loss of optionality. Thus being sell-able adds value to an asset.

The most persuasive (and conventional) argument is that by participating in a marketplace, we inflate the value of assets by making them more liquid. This benefits firms by lowering interest rates and inflating asset prices. Thus they can obtain capital at lower cost. Thus they can invest in projects with lower expected margins. Thus more projects are invested in, and economic activity increases.

I've read that in the era before securitization, illiquid loans to creditworthy borrowers typically ran 10-15%. That's a long way from the 2-4% yields we see on today's IG corporate debt, and the 4% earnings yield on stocks at today's multiples. Fast-growing liquidity has raised asset prices to the point that investment returns are arguably too low to support retirements. This too may be good for the economy. If we all must work until we die, and are thereby blocked from being rentiers, more was probably produced. But it also exposes the folly of this whole approach. If perfect liquidity means a near-zero cost of capital, such an economy would be indistinguishable from serfdom, because there would be no way for a worker to advance to the rentier class through their savings. Even worse, low returns create incentives for workers to save more (see the savings rates in China and Japan). High savings reduce consumption, which kills the economy in the end.

vand

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Re: Does buying stocks help the economy?
« Reply #11 on: July 29, 2020, 04:41:58 AM »
Capitalism relies on prices set by the free market in order to efficiently allocate capital.

However lasse-faire economists such as the Austrian school are critical of the system of crony capitalism that characterises western economies today.

They argue that currency printed and distributed doesn't represent real resources. Price signals set by monetary expansion rather than as the result of free market supply and demand are more prone to give false signals under the principle that we are more cautious spending our our money than we are someone else's, ie the government creates moral hazard.

Another big problem is that there tends to be a crowding out effect where real market driven price signals are ignored and capital is diverted to more unproductive resources as a result of government policy.

So all in all it's not very clear cut at all. I don't think its controversial to say that absent the Fed, stocks would not be brought as heavily as they currently are. So, in light of this, is the Fed's open market operation net effect a positive one, or has it overdone it so much that it has created a huge amount of malinvestment? If it's the latter then, rising asset prices could even be said to be value-destroying to the real economy.

« Last Edit: July 29, 2020, 04:44:08 AM by vand »

ctuser1

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Re: Does buying stocks help the economy?
« Reply #12 on: July 29, 2020, 05:33:20 AM »
However, the percentage of stock trades that meet that definition is probably less than 0.0001%.

Not sure why you say that.

Let's take AAPL. It has a daily volume of ~35 million shares (~$9B/day, assuming I am reading the data correctly). This means that if I was a large hedge fund trying to dispose off a $1B position, then I won't have to worry about moving the market too much if I dumped it on the market over a day or two with some restraint.

If the volume was lower, getting rid of this $$ of the position would have been much harder -> market efficiency distorting mechanisms like dark pools and such.

You could argue that most of this volume is bots and hence the actual buyers are not relevant. But I don't think that is correct. Bots are generally not net buyers or sellers. They balance out their book very quickly and just try to (legally) front run your large trades. In the absence of any real buyers, they will magnify any directional signal your activity will send to the markets and cause inefficiency.

Granted, the above chain of logic is not constructed based on any real, peer-reviewed economic research. So it is quite possible I am totally missing something or constructing the chain of logic incorrectly.

ChpBstrd

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Re: Does buying stocks help the economy?
« Reply #13 on: July 29, 2020, 08:22:20 PM »
However, the percentage of stock trades that meet that definition is probably less than 0.0001%.

Not sure why you say that.

Let's take AAPL. It has a daily volume of ~35 million shares (~$9B/day, assuming I am reading the data correctly). This means that if I was a large hedge fund trying to dispose off a $1B position, then I won't have to worry about moving the market too much if I dumped it on the market over a day or two with some restraint.

If the volume was lower, getting rid of this $$ of the position would have been much harder -> market efficiency distorting mechanisms like dark pools and such.

You could argue that most of this volume is bots and hence the actual buyers are not relevant. But I don't think that is correct. Bots are generally not net buyers or sellers. They balance out their book very quickly and just try to (legally) front run your large trades. In the absence of any real buyers, they will magnify any directional signal your activity will send to the markets and cause inefficiency.

Granted, the above chain of logic is not constructed based on any real, peer-reviewed economic research. So it is quite possible I am totally missing something or constructing the chain of logic incorrectly.

My point was that the only stock trades that put money into companies are IPOs, specifically the first trade in a share's life when it is bought directly from the company. From then on the share can only cost the company money by requiring dividends or having to be bought back. Such trades are a tiny minority of daily or yearly volume. If someone trades in and out of AAPL and "makes" $100 or loses $100 versus some counterparties, AAPL and its level of production are unaffected. Similarly, if I buy and hold AAPL shares for 10 years, AAPL is unaffected except for perhaps the expenses of dividends and paying for correspondence with me.

js82

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Re: Does buying stocks help the economy?
« Reply #14 on: July 29, 2020, 08:38:24 PM »
Not as much as the proponents of buying stocks think.  In my opinion, not a whole lot at all for most companies, but quite a bit for a small subset of cases(mostly IPO's).

Here's the general gist of it:

In this current era, the growth of large companies is very seldom capital-constrained.  Most large companies have been spending more on dividends and stock buybacks and... less on everything else.  If companies' growth were constrained by capital, I might acknowledge the validity of this argument - but in the modern area that's seldom true.


The notable exception to this are startups.  The Teslas, etc. of the world need to get the capital to launch their businesses from somewhere, and the money raised through IPO's/selling stock is important for these sorts of companies.  But the overwhelming majority of companies whose stocks we trade, we aren't materially helping by doing so.

celerystalks

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Re: Does buying stocks help the economy?
« Reply #15 on: July 29, 2020, 09:00:47 PM »
Absolutely it does. Otherwise without an active stock market, every company would be subject to partial or full liquidation when a loan is due or an inside investor wants out and is not be able to be bought out by another close investor.

Stock represents permanent capital of the company. The company cannot be forced to redeem it like a bond. If an owner of stock wants out there is a secondary market for their shares.

Furthermore, businesses are engaging in open market transactions all of the time in order to return or raise capital from the share holders.  The fact that an investor does not know who they are buying from does not mean that it is never directly from the company selling blocks of shares on the open market.

Additionally an active liquid market greatly facilitates mergers and acquisitions by providing for valuing a company.  Without an active stock market the value of large businesses would difficult to discern.

If a person has $150,000 they could likely buy a truck and hire an employee to start a trucking business. Or they could invest that money in the stock of a trucking business looking to raise money, which could sell shares to obtain that cash and use it to buy a truck an hire that employee.  In either case the result is that the invested financial capital is used to acquire capital stock and engage in profitable economic activity. But, the difference is that the second way is much easier for for the investor to transfer their ownership of the truck (and their share of everything else the business owns) to a subsequent investor. And the owners of the stock gets to benefit from the efficiencies of professional management and the pooled capital resources of a multitude of other investors.

FINate

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Re: Does buying stocks help the economy?
« Reply #16 on: July 29, 2020, 11:07:17 PM »
No sane person will buy IPO shares if there isn't a reasonable expectation of selling them for what they're worth later on, presumably for more than the initial investment. The same is true for the person buying these shares IPO+1, and IPO+2, ..., IPO+n - liquidity is a necessary condition for IPOs to exist in the first place. When you buy stocks (index funds, even) you're contributing to market liquidity and, yes, this helps the economy.

LennStar

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Re: Does buying stocks help the economy?
« Reply #17 on: August 08, 2020, 11:30:40 AM »
Buying stocks does not help the economy, only old rich white guys like us ;)

Putting asiude what "the economy" is...

The answer is simply derived by asking "does the company recieve the money"?
If you buy a stock, the money goes to whoever had the stock before. That person may use it to buy stuff, but I would  put the chances for that under 50%.

Even with IPO, where the money does go to a company, you could argue it dies not help the economy. Because that IPO company may use the money to invest and earn more, but if it did not do that, isn't it very likely that those earning would have been spend at a competitor (or something totally different)?

What helps the economy is buying stuff.
What helps the earth and the human race is not buying stuff.