We have all heard about the stock market, but for many of us it’s a rather vague concept that goes something like this: Some people invest money in something and then either make more money or lose the money they invested. Yes, that’s the basic idea, but let’s try to flesh that out a little bit more to give us a better understanding of what it’s all about.
Stocks, which are also called equities, are a type of security that gives an individual partial ownership in a company that is publicly traded. You own a small part of the company when you buy stocks in it. The units of stock are called shares since you are sharing ownership with many other people. When you buy more shares you have more stock, or ownership, in the company, and the company uses your investment to further grow their business in the hopes that everyone involved will profit. People trade these shares in various ways, these days the internet is where you can find a share investing platform that allows you, the investor, to manage your stock shares online.
Stocks are typically divided into two main types, common stock and preferred stock. The difference is that common stock provides shareholders with the right to participate and vote on various company issues, while preferred stock makes you a spectator, but pays you higher dividends so you receive a larger return for your investment.
The stock market is comprised of a network of stock exchanges that enable traders and investors to purchase and sell shares in publicly traded companies. These companies make shares of their stock available in a process called “IPO”, or “initial public offering” which places them up for sale on a stock exchange. When a private company becomes listed on the stock exchange it gains the status of a public company that can offer its shares for purchase by investors and traders, with the exchange tracking fluctuations in the stock’s price. This price is governed by the principle of supply and demand, and the willingness of participants to buy or sell.
It’s also important to note that there are two types of markets- the primary market, and the secondary market. The primary market is where shares are created via the IPO process, which makes them publicly available. The secondary market, also called the stock exchange, is the place the shares are bought and sold, with thousands of trades taking place daily.
The stock market achieves two purposes. The first thing it does is assist companies by raising money, also called capital, providing a platform for them to offer shares to the public, which is then used to fund projects and expand the business. The second thing it achieves is it gives the investor who has made the stock purchase the chance to share in the profits, helping both parties to prosper. Some types of stocks regularly pay a dividend, a sum of money per share owned which can pay back and surpass the amount invested in the form of a return.
The stock market is a great opportunity for both companies and their investors to increase their profits!