Stock market, even though this term has always been confusing for many of us, it actually isn’t that complicated. Let’s dive into this article to clarify some basic concepts about stock markets.
Let’s first define what a Stock is ?
A stock or a Share is a title representing a fraction of a company’s capital and which confers certain rights on the holder. The purchase of of shares ( stocks) allows investors to become partners in different companies on the market: stock ownership implies that the shareholder owns a slice of the company’s capital equal to the number of stocks held, in return they receive, annually, a sum of money from the company’s profit and that’s called a dividend .
Stock market: a financial market where shares (stocks) of different companies are bought and sold .
Stock market has been known as a place where people go to trade (sell/buy) stocks with other people but nowadays all of those operations are done online instead of physical place.
Historically, the Dutch East India Company is considered as the first stock exchange company in the world. It was founded in 1602 by a royal charter and was the first firm to offer shares of its business to the public.
The Dutch East India Company managed to dominate the spices trade in the Indian Ocean during 2 centuries.
Today more than 630,000 companies are traded publicly throughout the world.
Why does a company sell stocks?
Selling stocks allows a company to raise massive amounts of operating capital with no extra effort. When a firm establishes itself it may need larger amounts of capital than it can get from ongoing operations or from a traditional bank loan so it resorts to selling shares (stocks) to the public, this changes the status of the company from a private firm, owned by its founders, to a publicly traded company whose shares are held by numerous members of the general public.
The modern stock market often bases the value of a company on its potential earnings, this means that relatively small companies can earn millions or even billions if investors think that it can succeed in the future.
The stock market is composed of millions of investors and individual traders who feel different ways about a company, they all make independent choices which result in positive or negative movements of stocks. This market obeys the law of supply and demand: if more people want to to buy the prices go up, if people don’t trust a firm’s potential and aren’t ready to buy its stocks the prices go down.
The price is generally set through an auction process: traders place bids( price at which they wish to buy) and asks(price at wish to sell) and when the bid matches the ask the trade is done.