> that's what the market is primarily for, getting capital to companies that need it;
Personally, I believe that is incorrect. The amount of market activity related to getting capital to companies is dwarfed by other activity. As data points:
- Commodities markets don't allocate capital to companies (or farmers or whatever) at all.
- Most new stock sales (IPO or otherwise) happen outside of the public markets first, and are allocated to a minority of the market participants.
I think a much better way to think of the markets is as primarily about pricing risk. That this risk assessment function happens to provide a good way to allocate capital to companies is a by product.
You should perhaps read more than the first two sentences before replying.
> This secondary market is the other function of the market (what you just called investing in the flow of money in and out of a position). Both are necessary.
I clearly addressed that markets have more than one function.
I was reacting to the word primary. I think that is a common (especially on HN) misconception. The markets make more sense when you don't think of them as mechanisms to fund companies, and do think of them as ways to trade risk and liquidity.
I'm not convinced that the capital allocation component of the markets is even as you say "necessary". You could easily envision the markets chugging along fine without allowing any direct sale of equity to the markets. That is some intermediary would be required to buy the equity from the company as it became available and in turn could then sell that equity into the markets. We are almost to that point already.
Personally, I believe that is incorrect. The amount of market activity related to getting capital to companies is dwarfed by other activity. As data points:
- Commodities markets don't allocate capital to companies (or farmers or whatever) at all.
- Most new stock sales (IPO or otherwise) happen outside of the public markets first, and are allocated to a minority of the market participants.
I think a much better way to think of the markets is as primarily about pricing risk. That this risk assessment function happens to provide a good way to allocate capital to companies is a by product.