How Does The Stock Market Work ?
If you want to know how the stock market works, then you have to first look at the history for corporations and limited liability companies (LLC). Corporations have been around ever since one owner convinced other people to collate their money for common benefit. |
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The first corporations were formed in Britain in the early 16th century. These corporations were more like the present day public corporations that are owned by the government like the postal service.
In the US, the UK and Europe, private corporations started evolving in the early 19th century when governments started allowing ordinary people to create companies. However, these corporations required money to do business; and usually one or two people would contribute funds so that the company would get started. In addition, the company owner would also put in his money but usually it would not be enough so he would convince other people like banks or venture capitalists to invest.
In return for the investment, the company would issue bonds or stock to the investors. And stock owners soon realized that they would need one central location where they could trade stock with one another. This gave rise to the public stock exchange, and the present stock exchanges have arisen from this.
Today, any company can create as many shares as it wants. Each share entitles the owner to a small portion of the ownership of the company. The more shares a person has, the larger his share of ownership, and the more control he has over the running and operations of the company. The companies also create different types of shares that have different benefits associated with them. These shares are sold to investors for a specific price and in return, the company will use the money to grow the business and pay dividends on the shares. A company can keep creating new shares as long as it can find buyers for them.
These shares are bought and sold in the stock market. The stock market is governed by its own rules and the rules laid down by the government. For example, the NYSE is a non-profit stock exchange, while the NASDAQ is a for-profit stock exchange.
When companies sell their shares, they go public. This means that the ordinary man has an opportunity to buy shares and invest in a company. In order to go public, a company has to meet certain criteria and file paperwork with the government and the stock exchange where it wants to sell its shares. The company decides how many shares it wants to sell to the public and the price of each share. When all the shares that are issued as sold, the company then uses the money and plows it into its business.
This is the simplest way of explaining how the stock market works.
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