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How can one explain in a few words why equity trading is an active contribution to the development and growth of economy?

At first sight it seems counter-intuitive (for the layman): Buying newly issued shares of a company gives the company money which it can spend in research and development of new products or more efficient ways of production. Trading with shares later is not for the immediate benefit of the company anymore.

But why should one buy newly issued shares? Firstly because of the dividends one expects. But that's not all: Also because one hopes that one can sell them later for a higher price. This prospect is it that lets one give money to the company. If there was no equity trading, people would not buy shares, and companies would not get money.

Is this kind of reasoning too naive? Do I give meaningless answers to a meaningless question?

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How can one explain in a few words why equity trading is an active contribution to the development and growth of economy?

In brief the explanation is simply that capital markets (e.g. stock market) allocate capital to companies that are expected to get highest return on that capital. In turn efficient capital allocation helps economies grow. As you mentioned people buy shares because they expect dividends or to sell them at higher price later.

Trading with shares later is not for the immediate benefit of the company anymore.

This is actually not entirely true. Secondary market for share makes stock market more liquid. If there is more liquidity more people will be willing to invest than if there is no liquidity. If there wouldn't be secondary market less people would invest into newly issued stocks as well.

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    $\begingroup$ Thanks for the hint to liquidity. This explains a lot. But then one could distinguish two different types of equity traders: Those who invest into newly issued shares regularly or frequently (i.e. participate in the primary market), and those who only trade on the secondary market. The first type seems more "legitimate" and "contributing". And couldn't we think of a market where only the first type of traders is present. Is the second type really needed? $\endgroup$
    – Hans-Peter Stricker
    Mar 23, 2022 at 8:57
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    $\begingroup$ @Hans-PeterStricker but those will often be the same people. For example, one person might not be willing to invest into new company A stock if the same person cannot resell it in 5 years when the person plans to retire. Whoever, holds the stock later enables the first purchase of the stock. So people who invest into new stock and people who resell it will often be the same people. As for whether you feel some trades are more legitimate or not you can feel however you want but economically there is not that much meaningful distinction and secondary market is important for supporting primary $\endgroup$
    – 1muflon1 ♦
    Mar 23, 2022 at 9:03
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    $\begingroup$ Market by creating liquidity and in addition it also helps price discovery. $\endgroup$
    – 1muflon1 ♦
    Mar 23, 2022 at 9:06
  • $\begingroup$ I've overseen this: There are people who only buy and sell once. But what about professional traders: Are there some who intendedly don't buy on the primary market (maybe because it's too risky)? $\endgroup$
    – Hans-Peter Stricker
    Mar 23, 2022 at 9:10
  • $\begingroup$ @Hans-PeterStricker professional traders do buy intentionally also on primary market. I do not know how you made that observation but it is not accurate. $\endgroup$
    – 1muflon1 ♦
    Mar 23, 2022 at 9:16

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