How do Stocks Work
The word ‘shares’ and ‘stock market’ must have hit your eardrums innumerable times. When you pick up a newspaper in the morning or are scanning through TV news channels, in all probabilities you’ll come across the words, stocks, and share market.
Personally, I’m amused at the daily fluctuations of the value of these stocks in the market. Undoubtedly, a good day in a stock market can earn a profit of millions and a bad one can leave you penniless! Before we get to the working of the stock market, let’s understand what is a stock market, so that it gives a better idea about ‘how stocks work’.
Basics of Shares and Stocks
The concept of shares and stocks, is incredibly simple! If you own a firm’s share, then it means that you’ve gained some ownership of the firm’s assets and profits. The dividend, that you get at the end of the year (generally) represents the share’s part of the firm’s profit. The dividend is the payment each shareholder member gets from the firm or company. Let me substantiate the definition of stocks and shares by a simple example.
You, along with your 3 friends, decide to open a restaurant in your locality. The total expenses incurred after setting up of the restaurant is, $50,000. After some months, you’ve started earning a profit of $30,000 per month and your business has been successful. Now, supposing that you can sell your business for $50,000 (the amount you invested), it can be termed as the asset worth of your business. Each of the 3 owners can own one share of the business and that also corresponds to 1/3rd of the profit (dividend). In other words, it corresponds to 1/3rd of the assets and 1/3rd of the profits.
For larger firms, there are billions of share holders, and each gets a dividend at the end of the year! Fascinating isn’t it.
Selling Stocks at Stock Markets
For small businesses, like I mentioned in the above paragraph, if you wish to sell your business, you can give an ad in the newspaper or sell it on a person-to-person contact basis. In private holdings and firms, only few people like boards of directors etc. are shareholders. But what if some multi-billion dollar company has to sell its business? To find buyers and share holders for large firms, you’ve to register in stock markets.
The stock markets are registered markets where the process of selling and buying shares is carried on. In general, there are two types of stocks markets, the primary and the secondary. Firstly, when a firm is trying to sell its stocks, it’s done in the primary stock market. You must have heard of IPOs (Initial public offerings). Initial public offerings is the first time a company issues its shares. The IPOs are also used by firms who are in need of capital to expand their business. Many big firms list their IPO’s so that they can get a platform to sell their shares to the general public.
Buying stocks through an IPO can be risky as the future performance of the firm can be poor, but if the firm has good potential, there are high chances of great dividends. The secondary market is commonly called the stock market, in which the past shares that have been purchased or sold are traded depending on the value of those shares. One of the world’s largest stock market, the New York Stock Exchange (NYSE) is located in New York city, USA.
So, did you get ‘how do stocks work’? Well, this was a very simple explanation of the working of stock market. How stocks work, is certainly an interesting thing to know as directly or indirectly our economy and lives depend on how well the stock markets are doing.
