The stock market seems like an elusive place where money managers and wealthy investors hang out. However, the basic premise of how the stock market works is not that complicated. The basics of the stock market are straight forward and can be broken down into three simple steps:
When a company starts out, it is a privately held company. This means a small number of people own either parts or all of the company. If the company grows and reaches a point where it meets the SEC and stock exchange qualifications for going public, that privately owned company can choose to sell stocks, or ownership, to the general public on the stock market.
The stock market is essentially a platform for public companies to sell ownership to investors. Understanding why companies list stock is important. Generally speaking, they do this for several reasons including to raise capital, reward staff or create profit for initial investors.
However, there can also be negative reasons for going public. For example, a company may go public to make the money to pay off some of its debts. It may also go public to launch a new product that is not yet available on the market. Although these reason may not always be negative, they can affect the success of the company when it offers its initial shares in an initial public offering (IPO).
Once the stock becomes public and is listed on the exchange, it is available for investors to buy through licensed brokers.
People outside of the company want to buy stock because when the company performs well, its value increases. When stock values increase, the money investors put into the stocks also increases, which means investors make a profit or receive dividends. This is the basic premise underlying how people get rich playing the stock market.
Because investors are not tied down to a company when they purchase stock, they are free to buy and sell that stock at will. Investors make trades when it looks like a company will not perform as well as expected and it becomes clear that they will lose money. They may also make trade when it looks like the price of shares in a company are about to grow.
The whole stock market reflects the fluctuations of these constant exchanges made by thousands of investors every day. The goal is simple: buy the right shares for a small price and sell them for a higher price.