What's the stock market myth?

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.