Understanding the Stock Market

First of all, to understand the stock market, you need to understand exactly what a stock is? When you buy a share of stock in a company, you are in essence, buying a percentage of the company. Most of the time, this represents a very small fraction of a percent of the company, but nevertheless, you own part of the company. Each piece of office equipment, each building that they own, is now partially yours. It's yours along with thousands of other shareholders in the company. You also now have a vote for anything that requires voting rights in the operation of the company. Most of the time, if you are a normal investor, you won't have enough of a say to determine what goes on in the company. These decisions are usually heavily influenced by those with millions of dollars invested. You will have limited representation, but managing the company probably isn't what you have in mind when you buy stocks anyway.

In the old days, you used to receive a physical piece of paper that stated that you were a stock holder. You got a piece of paper for each piece of stock that you owned. Then when you wanted to sell them or trade them, you had to bring your physical stocks into the broker to use them. Now, this is all done digitally. With the click of a button, your stocks are bought or sold. Record of who owns them is kept track of at your broker. This allows liquidity to be at an all-time high within the industry. You can buy and sell everything in real-time.

What exactly do companies have to gain by selling stock? Money...and lots of it. Every company requires capital to grow. When they need this money, they can either borrow the money from a lender, or they can sell part of their equity in the form of stocks. This means that they get instant access to millions of dollars when they go public in the form of selling stocks. However, they have to share their profits and decision-making ability with all of their shareholders. They give up something to get something.

Overall, the stock market is all about companies getting better. When they improve, the price of their stock goes up and the shareholders make money. There is a lot of other detail about it, but in its most basic form it boils down to this.

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