Many people talk about investing in the stock market to create wealth or financial independence but what is the stock market and how does it work. well let's answer those questions in today's article.
What is stock market and how does it work?
Let's get started, the stock market is a global network of exchange where large sums of money move on a daily basis. the stock market does not trade a goods or services. they trade securities. securities are rights to financial assets like a business share.
A share is a portion of ownership in a company, when a person buys a share of a company they are buying a small ownership in this company, but why are shares traded at all in order to build a large business founders need resources.
Imagine the company as a pie. the pie is divided in slices these small slices of the pie are shares of the company companies. typically sell their shares to raise capital to grow and expand their business.
Many do this through an initial public offering or IPO. this is when a company begins selling a portion of their shares to public investors in other words the company goes public and anyone can buy parts of the company and in order to facilitate the trade of the securities to the public.
A company needs a marketplace to make their transactions. this is where the stock market comes into play. there are many stock exchanges around the world, where stocks are traded in the u.s.
Stock market work globally
We have the New York Stock Exchange in the Nasdaq in New York City and a few others in Canada. we have the TSX the NSE in India and the jpx in Japan. just to name a few these make a global exchange system where shares can be traded all over the world. this allows companies to raise money to continue the growth and expansion of their companies.
For example Facebook in its initial public offering sold over 421 million shares at $38 per share. this earned Facebook over 16 billion dollars from investors. typically share values reflect how well a company is doing in business as the company expands in Rosen value so do the individual slices of the pie. this is great for investors because it means that as the company grows in value so does their original investment.
Sometimes the pie gets so big that the individual slices also get big and expensive. this is when stock splits occur for example if you bought 10 shares of Apple, right after they went public in 1980. you will now own 560 shares without any further investment this happens when the company gets too big and their individual shares get too expensive for the average investor to buy.
Splitting process of stock market
For example let's say you took your company public with 100 shares. you decided to sell 50 of these shares for $100 each as your initial public offering. but now your company has grown significantly and your shares are now worth $500 each.
The average investor is no longer able to afford to buy your stock. so to make sure your shares are easier for the public to buy. you do a two-for-one split which means that each share splits into two shares. now instead of having 100 shares in your company, your company now has 200 total shares.
Splitting shares also means that you split the value of the original share by two your $500 share. after a two-to-one split are now two shares worth 250 dollars. each this encourages more investors to buy your stock in continue investing in your company. this also means that investors who initially but 10 stocks of your company now own 20 stocks.
The value of their investment remains the same Apple for example had their initial public offering on December 12 1980 selling their shares at $22 per share. Apple had her first two-to-one split in 1987 when the stock hits $79 per share reducing the share price to $39.50 per share.
This means that if you bought 10 shares right after the IPO you will now own 20 shares of Apple. their second two-to-one split happened in the year 2000 when the stock was trading at 111 dollars per there. this means that your original 10 shares are now 40 shares worth fifty five dollars and fifty percents each.
Apple had a third two-to-one split in 2005 when the stock traded a $90 per share dropping down the share price to $45 per share meaning your 10 shares are now 80 shares at $45 each and recently in 2014. Apple had a 7 to 1 split. when their stock hits 656 dollars per share making your original 10 shares become 560 shares at the value of 93 dollars and 71 percents each.
As of February of 2020 Apple stock is worth three hundred and twenty seven dollars per share. making the value of your initial ten shares you bought for two hundred and twenty dollars to be one hundred and eighty three thousand one hundred and twenty dollars.
This means that if Apple didn't split their stock today each original share that sold for twenty two dollars in 1980 would be worth around eighteen thousand three hundred and twelve dollars a little intimidating for the average investor now stock prices. don't always reflect the state of the company a bad rumor about the company can bring its stock value down regardless of its actual business performance.
Competition in stock market
The opposite can also be true many investors can buy shares of a company. if they see great potential behind an idea, this is great for new companies young companies can raise capital for their businesses, even if they're currently losing money.
A great example of this is snapchat the social media platform was actually not profitable before it went public yet they raised over three billion dollars in their IPO in the best case scenario companies can use this capital to make their idea a reality and begin making profits in the worst case scenario.
Profits and losses in stock market
The company runs out of money before they can become profitable which can lead investors to lose their money. companies can be worth billions on paper due to speculation creating a financial bubble, where the stock price is much higher than the practical value of the company. this can lead to the loss of some or all the money invested
This happened in the United States in 2001 many internet companies were starting up and since the internet was a new trend many investors poured money into new companies. that fell to turn a profit many investors but shares at a high price expecting companies to grow in value. when this didn't happen many investors sold their stock bursting. this bubble resulting in the 2001 economic recession.
Now share prices are influenced by many different factors from the company's image to investors supply and demand of the company shares in many other factors. this leads to daily fluctuations of share prices. this is one of the reasons why investment experts recommend diversifying your investment portfolio and invest in the long term.
If we take a look at the history of the stock market it has both expansions and recessions, but historically the US market trends up in the long term. now that you understand how the stock market works and if you have any doubts regarding stock market you can simply comment and ask your question. Our team will definitely help you.
Thank you so much.
This is dummy text. It is not meant to be read. Accordingly, it is difficult to figure out when to end it. But then, this is dummy text. It is not meant to be read. Period.
If you have any doubt please let me know or contact with us. ConversionConversion EmoticonEmoticon