The stock market is a network of traders and investors that buy stocks/shares in the hopes of getting huge profits.
You might have heard bad stories about it. They usually stem from friends and family members who have invested their money only to lose them in the short-term.
Those people suffer because of a lack of understanding of how the stock market really works and how to maximize your investments.
So in today’s article, I will explain how the stock market operates and I will do so by giving it the simplest explanations so that the vast majority of people can understand in the context of professional stock market.
How a Stock is Sold
If you’re an investor, you will be asked to buy some stocks to build up your own portfolio. But, how exactly are they sold and where do they come from?
A stock (or share) is actually a representation that you have a part ownership with a company or organization.
Suppose that a company wants to expand to different areas. The owner would need a lot of capital to do that; money that they may not have enough of in their coffers.
To get more capital, they will “go public” and cut out their stocks for the public to purchase.
This is usually done by creating an Initial Public Offering where the company’s stocks are made available to the public for the very first time.
By default, the owner of the company will have 100% of the shares. And, when it is “going public” and people buy their shares, their total hold of the organization will decrease.
To prevent a transfer of ownership from happening, the owner of the company would be wise to sell only a few stocks just to get enough capital, or they run the risk of someone owning the majority of the shares, which will then have consequences like a change in the direction the company is heading, among other things.
How Investors Get Money
Once you buy even one stock from a company, you are now called a shareholder and every year, the company you bought stocks from is obliged to give you some sort of payment called a dividend.
Since the idea of doing an IPO is to get more capital, the company is said to expand and grow rapidly and the bigger it gets, the more profits it will have. And, the more profits it will gain, the bigger the dividend payments will be.
If you’ve acquired preferred stocks or stocks that are of “higher value”, the company is set to pay you first before the common shareholder.
The Stock Market as an Auction
Some people think of the stock market as a gambling institution. People who say that it is such are most likely the people who do not know the ins-and-outs of the share market.
Although you could potentially lose your investments, doing the right things will hedge against such devastating losses.
In conclusion, you should think about the stock market as an auction where a network of investors buys or sells company stocks as they see fit.