Updated: Aug 31, 2020
The stock market $SPX500 is at all time high but the economy is not doing great. So, who really wins from the stock market?
The main function of the stock market is not for investors to trade stocks but rather to help companies raise capital through shares offering. For example, in 2012, Facebook $FB had its IPO and was able to raise $16 billion. IPOs are, therefore, good for the economy.
But today, when you're buying shares of Facebook, the company is not making any money and it is not contributing much to the economy. After the IPO, Facebook raised a further $45 billion by issuing more shares. In total, Facebook raised $62 billion. Why does Facebook then have a market cap of $750 billion?
Facebook and any other company has to dilute their shares if they want to raise more capital on the stock market, therefore, they prefer to issue bonds. Bonds are also issued by governments and overall, bonds contribute more to the economy than stocks.
The stock markets still has importance since when you own a stock, you're an owner of a company and as an owner you're entitled to some rights. For example, you can profit from the profits of the company. Normally, there are three ways a company can return profits to shareholders, dividends, buybacks, reinvested capital. Shareholders/companies can use that money to contribute to the economy.
But the problem that we're seeing today is that the stock market is 180% the economy. The stock market is not useless but when we have the Fed printing so much money, most of this money is useless and is not contributing to anything.
It doesn't make sense celebrating that the stock market is at all time high. What we need to focus on is value and not price. The fact that it is so easy to make money in the stock market today is something we need to be careful about. If the government can send the stock market at all time high, it can also crash it.
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