Reply #18: The reason stocks need to be traded is that different investors have different needs

[HamdenRice]

In your example, you seem to be accepting the legitimacy of a simply model of the company issuing stocks and the investors simply buying and holding. You seem to be questioning the need for a market of buyers and sellers.

So here is why you need a market, and buying and selling. Different investors have different needs. At the same time, companies go through life cycles that make them attractive to different stockholders.

For example, when a successful company first starts out and has an initial public offering (ipo), it typically does not offer dividends. That's because if it has discovered a really profitable niche, then more than likely internal re-investment of its profits is much more profitable to the investor than whatever the investor could do with dividends. Ford, for example, refused to provide a dividend for a long time (it had to be sued eventually to do so). IIRC, Microsoft also would not pay dividends. So the kind of investor who buys an ipo is someone who has the time to wait to take profits from the increase in value of the shares. For example, a young person investing for retirement might buy this kind of "growth stock."

When a company becomes mature, its internal profitability goes down, and to many investors they are better off getting the dividend and using/investing it elsewhere. The company becomes something like a utility, doing pretty much the same thing, throwing off the same dividend year after year. A retired person might invest in this kind of stock.

As the company changes from a growth stock to a mature stock, it will attract different investors. There has to be a place for one group to sell out to another.

It is also extremely important to all investors that their investments remain "liquid" -- that is, immediately convertible into cash, in case the money is needed. Hence the stock market has to be very large and liquid if it is to attract investors, and that means lots of daily trading. Speculators, while despised by many, do play a useful role in making markets liquid. There is no guarantee that the long term growth stockholder will find the retiree income stockholder in my example above, unless there are also people willing to just buy and sell as the opportunity presents itself.