Thanks for the elaborate reply but I was aware of all of this already. I wasn't questioning the utility of the stock market and understand its role as a price discovery mechanism and liquidity provider.
I was however questioning whether this sentence from the article was really accurate: "The function of the capital markets is to allocate capital".
I'd argue that trading existing shares, although it contributes to price discovery and liquidity, is not "capital allocation" (unless we're talking with respect to the buyer's capital like another commenter pointed out).
The Capital Market is more than just the stock market. The Bond market - the place where orders of magnitude more $$ volumes are traded is also a capital market. Both are allocating and reallocating capital to daily, and the price signals are just as important to future capital decisions of all participants.
Trading existing shares is not allocating capital (from a company POV), you are correct. But a company issuing new shares, for example, is an example of such. The markets set a price, and the company can take advantage of this liquidity to raise money
I was however questioning whether this sentence from the article was really accurate: "The function of the capital markets is to allocate capital".
I'd argue that trading existing shares, although it contributes to price discovery and liquidity, is not "capital allocation" (unless we're talking with respect to the buyer's capital like another commenter pointed out).