The Viewpoint: What’s the point of stock markets?

It is sometimes easy to forget the real purpose of equity markets. Fundamentally they exist to connect companies that are looking for permanent funding for their businesses, capital for new projects, or for acquisitions, with investors who are looking to share in the future profits of those businesses. By pricing shares of companies, markets are effectively setting the cost of capital for businesses. This process can produce some widely varying outputs.

When investors are pessimistic, share prices are relatively depressed, making the cost of equity for businesses high. Arguably, this has been the case in the UK market for some time. As a result, not many new companies have listed on the market. Conversely, many undervalued companies which are listed on the market have found themselves subject to takeover bids. 2026 has seen around £70bn of takeover activity so far.

If companies see their shares as undervalued, thus making financing expensive, they can buy back those shares and cancel them. This is something a huge number of UK companies have done with great enthusiasm. A striking example of this is Shell who in the past four years have bought back around a quarter of the equity in the company. That pool of retired Shell shares, were it a separate company, would be one of the top 20 companies in the FTSE 100.

Many new companies tend to rush to the market and the cheap capital they raise is often used to fund lots of new projects and deals.

On the other end of the enthusiasm scale, when investors get extremely bullish, the cost of capital for businesses can get very low indeed. When this happens, many new companies tend to rush to the market and the cheap capital they raise is often used to fund lots of new projects and deals. The wall of cheap money from bullish investors can often lead to companies pursuing more and more projects that require ever more optimistic assumptions to justify.

I saw that early in my career in the 1999 / 2000 technology boom, and while only time will tell on the Artificial Intelligence (AI) boom, it is hard not to see similarities. AI is very likely to change the world we live in, but it would be surprising if all of the vast investment currently going into the area ultimately generated a reasonable return.

Somewhere between the euphoria and bleak pessimism there are pockets where the UK market feels like it is fulfilling its raison d’etre. I would flag Informa raising almost £1bn of new equity to buy fellow trade events company Clarion or Landsec issuing £500m of new shares to buy the Metrocentre shopping centre. Both transactions appear to offer an opportunity for investors to participate in rewarding deals founded on reasonable assumptions. It is nice every so often to be reminded what the real purpose of our equity market is.

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