Last Updated on November 25, 2021 by Rajeev Bagra
Traders provide value to investors as trading makes a stock liquid, helping stock price reach closer to its intrinsic value. Suppose there is no trading for Google and a particular investor wants to exit. He/she may have to sell at a discounted price, lower than the intrinsic value of the share. In the worse case, he/she may not be able to sell at all on a particular day! What happens if you need to sell your home and do not find a buyer? You have to sell at a reduced price. But if there are a large number of buyers, you will be getting a value closer to its value based on the location, amount invested in furnishing.
Good quality stocks are traded more than poor-quality stocks. So, more trading for Google than Enron because Google doing a good job. This propels more investment towards good stocks. Traders may be seen as cheerleaders for stocks they find priced lower than their intrinsic value and whistleblowers for vice versa.
Brokerage houses with a source of income more from trading transactions than investment transactions are not parasites. They provide the necessary software to operate buy/sell transactions while disseminating news flow thereby helping discern the likes of Google from Enron. So, their brokerages are justified.
Now, looking at things from an individual perspective, maybe, there is no way to decide the direction of the market if you do only day trading (lifespan of day trading is one trading day). Traders/speculators engaged in Futures and Options have more time periods to settle contracts and can apply better research and understanding of trends while taking a call.