How Does The Stock Market Work – For Dummies
Stock markets are one of the greatest inventions of our capitalistic world. They work so simply and in the same time nobody can predict them. You trade financial instruments there, but in the same time it’s more a social ecosystem than you can imagine. Its moves are driven by almost anything that happens to our society – from economic fundamentals to emotions in our brains and future expectations. The market reflects not only the financial world, but its a barometer of our society as a whole.
What Is A Stock Or A Share
Before take a look at how the stock market works, let’s see what stocks are. Stocks (also called shares) are simply parts of companies. If you own Google stocks for example, you practically own a piece of Google Inc. and all its profits, assets and liabilities it has. If all the shares of Google were 100 and you owned 2 of them, you would poses 2% of the whole company. All public companies (like Google Inc., IBM, Apple, etc.) have issued a certain number of shares/stocks and if you want to buy some, you do this on the stock market. These companies are called public, because everybody (the public) can buy their stocks.
But why would a business want to issue shares and sell them to people?
Companies sell parts from their businesses mainly for money. Imagine that you have a great business (CoolBusiness Inc.), but you don’t have enough cash to grow it. Banks doesn’t want to lend you money, because you are small, you have no credit history, or whatever else. What would you do? You can sell a part of your business on the stock market for example. You can split the company into a certain number of shares (let say 1000) and offer them to people, who are interested (the investors) at a certain price (let’s say $10 each). The investors get a piece of a perspective business and its future earnings and you get the money to run it. In this example you can offer 500 shares (50%) to investors and keep the rest 500 (the other 50%) for yourself. In this case you will get 500 x $10 = $5 000 to finance CoolBusiness’ activities, but you will own just a half of your business after that. If you borrowed money, you would have kept 100% of the business, but you would have to pay it back. By issuing shares, you just sell a piece of your company and you don’t need to return the money.