Just about everything you have been told about stock markets and the UK economy is wrong. Politicians talk nonsense about stock markets. Financial advisors repeat it. The BBC reports FTSE 100 movements as economic news, and economics textbooks embed a set of false thinking in students' heads.  But the truth is that while the City of London likes to claim that stock markets are essential to saving, investment and economic growth, that is not true.

In this video, I challenge the claim that buying shares funds real investment in the economy.

To do that, I explain the crucial difference between the primary stock market, where companies issue new shares and raise money, and the secondary stock market, where existing shares are traded.

The reality is simple: the primary market is small, and the secondary market dominates. Most stock market activity is just the exchange of existing wealth between savers, not the creation of new investment.

I also look at the numbers. Trillions of pounds of shares are traded each year on the London Stock Exchange, but only a small fraction raises new capital for companies. Maybe 98% of all share trading is in secondhand shares, and the companies whose shares are traded get no money at all as a result of that. That breaks the assumed link between stock markets and real economic activity, such as jobs, productivity and growth.

The video also explores what stock markets actually do: they provide liquidity for unnecessary share trading, generate potentially quite misleading price signals about the value of companies, and it enables wealth to change hands and accumulate. What they do not reliably ever do is fund productive investment.

I then consider the policy implications. The UK provides large tax subsidies to pension saving in shares, yet the return in terms of real investment appears to be negative: the subsidy exceeds the sum that reaches businesses for productive purposes. That raises serious questions about whether public policy is directing money to the right place for the benefit of the economy at large.

Finally, I explain what really funds business activity, which is bank lending, retained profits and public investment.

If you think stock markets drive growth, this video will challenge that idea, I hope, because that claim is very largely a work of fiction.

This is the audio version:

This is the transcript:

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The City of London likes to peddle a myth, which is that stock markets are really valuable institutions. They claim they are fundamental to the whole process of saving and investment, and they argue that saving in shares creates jobs and investment in new business in the UK. The government likes to push this idea as well. Rachel Reeves is committed to it. A new report has been brought out suggesting that we undersave in shares, and all of this sounds intensely plausible, and all of it is intensely wrong.

The assumption made is that there is somehow a link between savings made inside the UK economy and growth. That's not true. Savings actually reduce the potential for growth inside the UK economy for one very simple reason. They take money out of circulation. They put it aside. They stop people spending. Stopping people spending does automatically reduce the potential for growth in the UK economy. This assumption is in itself wrong, but if the savings are invested in the wrong way, that problem is compounded.

The assumption about the stock market is that there is somehow a direct relationship between putting money into shares and new investments taking place within the economy. Politicians repeat this idea. Financial advisors repeat this idea. Textbooks have embedded this idea in economic theory. The City of London likes to sell it. But again, I repeat the point. That claim is wrong.

Let's look at the reality of what the stock market is. There are, in fact, two markets inside the stock market, and we need to understand them and the difference between them to understand why this claim makes no sense.

There is, first of all, something called the primary market for shares inside the UK, and then there is a secondary market. The primary market is tiny. The secondary market is big, and these two things are not in any way the same thing.

The primary market exists to issue new shares into the stock market. This is where something called ‘initial public offerings', or IPOs for short, happen. These are the places where new shares are issued by companies who have never been on the stock market before, and such companies do come to the market every year, although in fewer and fewer numbers these days because the attraction of being stock market listed is falling to the companies themselves.

It's also the case that some other types of share issue happen here. For example, companies can issue what are called ‘rights issues' so they can issue new shares to their existing shareholders. For example, you own five shares in a company at a price of £2 each, so they're worth £10. The company issues you the option to buy three new shares at a price of one pound each. If you don't buy those new shares, your existing shares will have gone down in value as a result. The incentive to buy the new shares is very high. The company does get the money in that case. This is a primary market activity in shares. And the companies do in both these cases, new share issues and rights issues, get the cash as a consequence of the transactions that have taken place. The companies directly benefit from these share issues. That is what the primary market in shares is all about.

The much bigger secondary market in shares is focused on everyday trading in shares and securities that are quoted on the London Stock Exchange. Of course, there are shares quoted on other stock exchanges as well, and everything I'm saying here applies to them too, but let's keep a focus on London because this is a UK-based video.

The shares that are traded in the secondary market are bought and sold between share savers. They'd like to call themselves investors. They're not. They're saving money. They're not investing in anything. Let's be clear about that. The company gets nothing, and I mean that, nothing at all, as a consequence of these share transactions, which dominate the stock market. The money that is moved goes from one saver to another saver: nothing goes to the company. But of course, City operators do get a rake off along the way, and they are known to encourage buying and selling shares just for that reason. They like the churn in shareholding because they make money every time a saver buys a share or sells a share, and they want them to therefore do that as often as possible.

The primary market gives companies money then.

The secondary market does not.

No new funds are created for companies as a consequence of the trades in existing shares, and the investment link is broken in that case. There is no relationship between savings in these secondary market shares and the companies in question.

Let's talk about numbers. That's important. The total value of the London Stock Exchange at present is around £3.5 trillion. I say around quite deliberately because it depends which markets you include. Do you include the full market, the full listing market, the FTSE100, the secondary market element of the full market, and do you include the AIM market as well? So as a consequence, there are a range of numbers available, but a figure of around £3.5 trillion is probably fair at present.

The value of the annual trading in the shares that are listed on the London Stock Exchange is probably around £5 trillion. Again, I stress this number is a little uncertain as to the amount. Why? Because some of the shares are dealt with by way of options. Some are dealt with by way of derivative instruments, and so we can't quite be sure of the value of shares traded in that way, but give or take, and perhaps being a bit cautious, we can say that around £5 trillion worth of shares are traded on the stock market each year. And as you will notice, the value of shares traded is significantly higher than the total value of the market. In other words, in principle, every single share that exists on the London stock market is traded on average 1.5 times a year, although in reality, it is a few shares that are traded very, very, very many times and some shares hardly get traded at all. But the fact is, we should compare these very large numbers with the total value of new shares issued.

In recent years, the highest value of new shares issued happened during the COVID period of 2020 and 2021. Up to £80 billion of new shares were issued in those years. Why? Because people were saving, and companies exploited that opportunity to secure some of that money for their own advantage. So the level of share issues in those years was high: £80 billion a year. Since 2022, the average value of new shares issued has been between £10 and £30 billion a year. Put that number as being the average, and what you can see is that the total value of shares traded a year at £5 trillion or £5,000 billion is vastly bigger than the £20 to £30 billion or so of shares that might be issued in any one year by a factor which is so large, it is staggering. There's a huge imbalance between these two.

Over 95% of all shares are traded secondhand. In more recent years, that figure has probably reached 98% of all shares being traded secondhand. As a consequence, we can very safely say that very little new capital is raised by the stock market. Its activity is therefore virtually irrelevant to new investment in plant, machinery, products, services, and employment in the UK, as a consequence.

And we must remember that not all the money paid to the companies that issue new shares on the stock market is necessarily being raised to fund that type of investment. Some of it is being used to fund merger and acquisition activity. Some of it is being used to repay debt, and some of it is simply being used for financial engineering, and no consequential growth in employment, jobs, or anything else arises as a consequence.

We are seeing something that is really weird here. A tiny proportion of all shares is used to fund real investment. Yet we are being told that the situation is very different to that. This is really worrying. So what we should talk about is what stock markets actually do. This is also important because it is usually grossly misstated by those who are its proponents.

Stock markets, first of all, provide liquidity. What does that mean? It means that they provide an opportunity to someone who has bought a share to sell it again. Now that sounds like a really useful thing, but when the number of shares that are issued for genuinely useful social and economic purposes is very small indeed, we shouldn't overstate the importance of this liquidity. We could do with much less liquidity than there is in markets. And we should remember that most of stock market liquidity is not about anything to do with the initial purchase of shares, which fund investment, but is all about the operation of the stock market as a gambling den, which is what it is properly described as.

The other thing that stock markets do is provide so-called “price signals” to markets about the values of companies. This supposedly is a great value. I don't think so. The reason why it's quite simple. Stock markets don't value companies. They value the shares in the companies that are traded, and at any point in time, no company trades all its shares; the vast majority will sit in singular ownership. I might have said already that, on average, every share on the stock market is traded 1.5 times a year but that means on most days, most shares are not traded. Therefore, the price signal that the market creates is for those shares that are being traded. And the trade that takes place is not necessarily providing a signal about the value of the company in question. It provides a signal about the state of sentiment, the state of the general trend within the market, rumours, and other such things. We are seeing this happening right now. The stock markets are moving not because of changes in the values of companies, but because of rumours about the state of peace negotiations in Iran.

Finally, stock markets trade ownership claims. This is true. The shares in a company do not represent anything more than a claim upon the company to participate in future income. The share does not confer upon the owner a right to manage the company. It does not confer upon the owner the right to claim the assets of the company. The company is quite distinct from its shareholders. There is a massive barrier between the two. All that the shareholder gets is a claim to the future income that the company decides, at its own discretion, to pay out by way of dividends in the future. That is it. But as a consequence, what the stock market provides is a mechanism for wealth to change hands, and this is particularly important. What the stock market does is provide an opportunity for wealth to accumulate. It does not provide an opportunity for wealth to be created because almost no new funding for investment is found there.

Why then has the myth of the importance of the stock market survived? In part, that's because economics talks about stock markets, focusing their attention entirely on the primary market for the issue of new shares, in other words, and they ignore the secondary market. That is a giant mistake by economics. Economics, as it is now taught, certainly misrepresents the nature of banking in the UK. It misrepresents the nature of money in the UK. It also misrepresents the nature of the stock market in the UK. Economics, as a consequence, is a giant exercise in misinformation in itself at present, and that is something that needs to change. But on the basis of the myth that our economics profession teaches to people, we think the stock market is important. The secondary market is largely ignored by economics, but that's absurd because it's the big market, and policymakers do like the myths that the secondary market creates.

They like the noise that happens as a result of the stock market. They like the fact that on the hour every hour, the BBC and other news outlets report what the movement in the FTSE100 is. They take that as a barometer of economic activity in the country as a whole, when it is nothing of the sort. It is just as irrelevant to the economy of the country as a whole as is the result of the 3:15 at Newmarket this afternoon, and they think that this noise provides them with an illusion of economic activity, which they appreciate, but which is of no real value at all.

Stock markets are, let's be clear, not investment engines that drive the UK economy. They are anything but that. In fact, they get in terms of subsidies to pension funds an investment of £80 billion a year from the UK government by way of tax not paid, but generate for businesses only £30 billion a year at most, of new investment. In terms of a deal for the UK population, this is a terrible outcome. The myth of the stock market is imposing a true cost on the UK economy and denying real investment.

This is important because the stock market's trade wealth but wealth generation has to come from elsewhere. Investment has to be funded, and if the money that the government is currently spending subsidising stock markets via pension subsidies was used to be spent directly on investment in the UK business sector, we would get a much better return on our money. We would really see growth. That is what we need to do as a consequence of the lessons from this video.

But we also need to understand two other things. Business is really funded by bank lending, and that matters. But it also matters in that case that we properly understand the nature of money and how it works within the economy, which modern monetary theory does, of course, explain, and businesses also fund their activities by saving themselves, in other words, by keeping back their retained profits and not paying them out to their shareholders.

There are, then, ways in which the UK business economy can be grown. There could be beneficial consequences from that. We could have the investment that we need in the rebuilding of the UK economy on a sustainable basis, which is now essential, but we are not going to get it from the stock market.

My point is this: the stock market has deliberately sidelined itself from that process. This is not an accident. It is by design. The City of London is not interested in wealth creation. It is only interested in wealth accumulation. The stock market represents the peak of neoliberal thinking and the peak of the illusion that is built into that thinking as well.

Governments have fallen for this. They're stupid to have done so. It's time for them to move on. It's time for them to change the design of pension funds. It's time for them to change the nature of pension subsidies. It's time for them to put stock markets on the backseat. It is most definitely time for them to stop promoting stock market investment as the way in which people should be saving for their futures. It does not work. We need to rethink where we are. This is a moment when we must reappraise how we look at our economic future, and our economic future does not need to be focused on stock markets.

That is what I think. Now, what do you think? That matters too. There's a poll down below. Please complete that, if you're so inclined. Please do leave us your comments. We do like reading them. We do take note of them. Please like this video if that's what you do. Please share it because YouTube notices that and that helps us, and if you're so inclined and want to make a donation to support this channel, thank you very much.

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