Two days ago, while starting my course on Investments to the new batch, I was discussing a point that wealth is always created in the real market and not the financial market. Let me explain the same. We many times tend to believe that it is possible to create wealth in the financial market. But financial market (and the entire financial system itself) is performing the function of mere intermediation. It helps to bridge the gap between the suppliers of capital and the ones demanding the capital. The capital has to ultimately flow towards production of goods and services. Thus the income generated from such production of goods and services is distributed to the suppliers of capital through the financial system/market. In the absence of demand for capital, the financial system/market looses its importance.
When an individual, who looks at creating wealth through various forms of investments in financial assets, may feel that the wealth creation happens in the financial market. But, in reality he is participating in the real market (producing goods and services) indirectly and the wealth created in the real market is flowing back to him in the form of interest, dividend, capital gains etc.
When an individual, who looks at creating wealth through various forms of investments in financial assets, may feel that the wealth creation happens in the financial market. But, in reality he is participating in the real market (producing goods and services) indirectly and the wealth created in the real market is flowing back to him in the form of interest, dividend, capital gains etc.
The end product of wealth creation is financial freedom.
ReplyDeleteDear Sir,
ReplyDeletevery interesting and truly fundamental. Thanks for sharing..
You also taught us Interest rate Swaps:)..I remember that you showed how a financial intermediary makes wealth for itself by taking advantage of the market imperfections.(can we consider that as wealth?)Again is this market imperfection is derived out of real market? if so how (preferably with your typical example approach)? Thanks for your thoughts.
Yours sincerely
Murali
Hi Murali...thanks for your comment. I am not denying the fact that people do create wealth from the market imperfections. But what I meant in the above post is from a "macro-long term-sustainable" point of view. For example, a speculator definitely creates wealth (for himself) by betting on market movements. My point is, for the financial market to exist(even with all its imperfections), a vibrant real market is required. Another way of looking at it is to ask a simple question: Can these so called wealth creators from financial markets do anything at all in an under-developed African nation, where the real market is not vibrant and the financial markets almost non-existing?
ReplyDelete