Why do we even need a stock market?

I believe Warren Buffet said that the stock markets really only need to be open on one day of the year. I think he is right.

You have to go back to the roots of stock markets to understand why they exist in the form that they do today. Imagine (a long time ago) that you own you own little company which bakes cakes. If a person with some money to invest thought you were doing an amazing job at running your company and wanted to buy part of your company from you, then he would have to come knock on your door and sit down at your kitchen table to negotiate with you the terms of the sale of part of your company to him. If you wanted to entertain competition in this sale in order to get a better price, then you would have to let a bunch of other strangers into your kitchen also and let them bid against each other.

Eventually, someone got smart and decided that there should be a single gathering place to bring all of the buyers and sellers together.

After about 100 years of this, there were so many buyers and sellers that most of them (the speculators) lost sight of the fact that they are actually buying and selling a part of a business (Warren Buffets view), and are simply making bets of the future values stocks. This is the case today.

The stock market was originally created to connect businessmen who needed money to develop their businesses with investors who had a lot of money to invest. The stock market made it easy for investors to invest their money in various businesses and take their money back whenever they wanted to by selling their investments to other investors.

But lately the stock market has become disconnected from true investment and became more of a speculation vehicle for making money. Investors often buy and sell shares without caring much if the company is managed well or not. Because they often hold the shares only for a short time. And it doesn't really matter to them if the company goes bankrupt the next year or not.

And this kind of short-term speculative investments allowed the managers of many companies to hijack their companies for their own use. They've started to siphon off the profits for themselves in the form of multi-million dollar bonuses instead of giving the money to the shareholders. And now many top managers of companies are multi-millionaires. While their companies are either bankrupt or nearing bankruptcy. And there is not much common shareholders can do about it. Because they don't really have any control over the management of these companies.

Perhaps the idea of the stock market was good to begin with. But it's not working so well now for both the companies and for investors. Because the managers of many companies are corrupt and out of control.

Long ago people invested in good things about companies, things like bonds (that were secured to some asset, like used to build a new factory, so the bond holders had a stake in the worth of the land, building, and machinery if the company went bust), or preferred stock (which was sort of a step between bonds and stocks where the share holder owned part of the company, got paid a fixed dividend, and if the company tanked then they got paid before the common stockholders did).

It was risky and speculative stuff to buy stocks over a hundred years ago.

Charles Dow, however, was a writer and figured an angle that might (indeed did) make him famous. He started writing about a select basket of really valuable companies that made things (industrials), and later added another basket of valuable companies that moved things (transportations), and still another group that supplied water, gas, and electricity (utilities). So Dow, and a slightly later partner Edward Jones, began to popularize the values of buying ownership shares (common stocks) in companies that were exceptionally valuable (blue chips, as in one of the higher priced chips in a poker game).

That is what started our interest in stocks, but what started the market itself is a slightly older story still. In most places there are areas designated as markets. People bring things to sell. People go there to buy. Some places are set aside for businesses to sell to businesses. On the edge of my town is a place where area ranchers bring their livestock and those wanting to sell cows or horses can show their animals and people who want to buy cows and horses stand or sit around the arena where the stock is offered and bid on the animals.

Similarly, there are places like that for all kinds of things. I know of sale barns (as they are sometimes called) for chickens, peanuts, cotton, and tobacco too. Many farm towns may have an "elevator" a tall storage building (as in elevated) where area farmers bring their wheat, corn, soybeans, peanuts, etc. The elevator company, frequently a cooperative owned by the farmers themselves, takes in grain or such sort of on consignment, then when they get an agreeable price or order somewhere in the bigger market places, they sell it and make arrangements to deliver it.

The same thing happens to shares of ownership in companies. If I (dreaming now) had $20 million and formed a corporation to place a bunch of small soup and salad restaurants, then I could be the owner of it all and the corporation serves the simple convenience of ownership and control. But suppose I wanted to get some cash and opened it up to others to own shares of it. I could simply hire a bunch of slick salesmen to go talk to folks and offer my shares, or I could take it to an exchange, a marketplace for stocks of companies.

The American Stock Exchange originally was just a New York City street corner. Those with stock shares to sell literally stood on a street curb and yelled out (called outcry) an offer of the stocks (the initial price then is called an "offer") and those on the street would then give counter bids (then called a "bid"). So a stock market then became a place where people would yell out "XYZ sell for $14" and hear "XYZ bid for $13". So when the seller either changed his number to $13 or the buyer changed his number to $14, then when the prices match there was a sale. The seller wrote on his ticket the number of the buyer and the buyer wrote on his ticket the number of the seller. At the end of the day, a clearing house or desk initially collected all the tickets and matched them. In most major exchanges, be it stocks or commodities and such, the clearing house buys for all the buyers and sells for all the sellers. So when the clearing house sees that there were tickets totaling 10,000 shares of XYZ sold and tickets totaling 10,000 shares bought, then the buys were confirmed. Brokerages (the trading members of the exchange) then exchanged money, brokerage A sold so many and bought so many, brokerage B bought so many and sold so many, so there is a difference because A sold more than bought and B bought more than sold, and then brokerage B gives brokerage A the difference through the hands of the clearing house.

The stock markets are the only efficient and fair method of exchanging stocks, bonds and other financial instruments. They offer liquidity.

How would you raise capital for a business if there were no stock market? You'd be driving your buggy all over looking for interested investors or holding events similar to tupperware parties. How would you know how to price your business shares or know if you are buying fairly priced shares of a company you wanted to invest with.

Without a liquid stock market, companies would not be able to raise investment capital to expand. Rather than having large efficient corporations, we would have smaller, less efficient companies. Our economy would be smaller, our standard of living lower, and we would most likely not be the world power we are now.

The economy would look much more like it did in the 1800's and early 1900's, with a small number of extremely rich people (Carnegies, Rockefellers, etc.) and a large number of working poor.

in response to steve D dont we now have a few rich and a bunch of poor working class people and capital can be raised by other ways than selling public stock and the country would still grow, just at a normal rate instead of 100% over 5 years because ignorant and greedy people and companies went unchecked

shanedude.... Yes the ratio of rich:poor now is very small and 1 percent of the population has 60 percent of the wealth. Well right now 1 percent is about 3 million people. Back in the 19th and early 20th century only a couple hundred families controlled the wealth and thats about 10,000 people. And poor working class in 2008 means you have to rent your house not own and only have one car, working class in 1832 meant you only ate 1 meal per day and if you got sick you died cause you didnt have money to see a doctor.

Companies sell ownership in the company to raise money for new equipment, expansion, etc. The ownership is called stock shares. Each share represents partial ownership in the company.

Some people want to sell their stock shares, others want to buy them. The stock market is an auction place where people can go to buy and sell their stock shares.

You don't have to use the stock market, you can sell the stock to someone else if you know who they are, but it is difficult to find someone wanting to buy them.

The stock market is where you can always find someone wanting to buy, and someone wanting to sell.

Good question! I don't know really.

Stocks only got started in the early 20th centry I think, and we did fine without it before that.

Roman empire did fine for a long time without a stock market!