I wrote a post on this a few years ago. There’s a few different roles that capital markets play, but I think the big one in terms of real economic value is probably warehousing. The financial markets—stock market, bond markets, etc—provide value mainly by warehousing credit. (Here I mean credit in a fairly general sense, including any sort of expected value at a later time in exchange for funds now—e.g. stocks are included, bonds are included, futures are included, etc.)
This provides value in much the same way as warehousing grain: when there’s a shortage of grain, the grain warehouses can can provide grain for a little while (albeit at a higher price) to avoid starvation. When there’s a grain surplus, the warehouses can buy up excess (albeit at a lower price) to avoid spoilage/waste. They smooth out the grain supply in time, and that’s how they make money. Same with credit: when there’s a shortage of credit, markets crash, and people/companies are desperate for cash. Those investors who were warehousing cash sell it, buying low-priced stocks/bonds/etc in exchange. When there’s a surplus of credit, asset prices go back up, and the investors sell their assets off. They smooth out the credit supply in time, and that’s how they make money.
Again, this isn’t the only way that financial markets provide value; see the linked post for more. But I do think it’s the main way.
I wrote a post on this a few years ago. There’s a few different roles that capital markets play, but I think the big one in terms of real economic value is probably warehousing. The financial markets—stock market, bond markets, etc—provide value mainly by warehousing credit. (Here I mean credit in a fairly general sense, including any sort of expected value at a later time in exchange for funds now—e.g. stocks are included, bonds are included, futures are included, etc.)
This provides value in much the same way as warehousing grain: when there’s a shortage of grain, the grain warehouses can can provide grain for a little while (albeit at a higher price) to avoid starvation. When there’s a grain surplus, the warehouses can buy up excess (albeit at a lower price) to avoid spoilage/waste. They smooth out the grain supply in time, and that’s how they make money. Same with credit: when there’s a shortage of credit, markets crash, and people/companies are desperate for cash. Those investors who were warehousing cash sell it, buying low-priced stocks/bonds/etc in exchange. When there’s a surplus of credit, asset prices go back up, and the investors sell their assets off. They smooth out the credit supply in time, and that’s how they make money.
Again, this isn’t the only way that financial markets provide value; see the linked post for more. But I do think it’s the main way.