There are two main benefits that traders provide the economy:
- Price Discovery
- Liquidity
Price Discovery
What is the ideal price for a stock? No one really knows. But, by the wisdom of crowds we would arrive at a much better guess. Trading freely would provide much better mechanism to discover prices that way. Just like neurons working on a network make us smart, the market is smart through the interaction of million of these traders.
In markets such as China where there are a lot of trading impediments (where short selling was traditionally banned) the prices go completely nuts and making their markets quite unreliable. Thus, although China is the world’s second largest economy, their financial markets are not seen as important.
Liquidity
As another writer wrote, you will invest in the market only when you are completely confident that you can get out of your investment at any time. While you will spend 1000s of dollars in commission and a few weeks of time to sell your home, you will always have buyers for the stock you own and sellers for the stock you wish.
The constant presence of these traders allows anyone to buy/sell vey easily, and helps build the foundation of capitalism. If people start worrying about liquidity, markets would cease to function (like it did during Lehmann crash, when mortgage bond liquidity went crazy)
Av: Balaji Viswanathan på Quora