How The Stock Market Works

What is the Stock Market?

The stock market is a place where buyers and sellers trade company stocks and company stock derivatives that are listed on a stock exchange in order to finance large enterprises and gain profit.

Where is the stock market located?

The stock market, even if the name suggests it, is not a physical location where buyers and sellers trade company stocks. Although most people perceive towering buildings as the stock market itself, the stock market is basically just the business interaction between the buyers and the sellers of the company stocks.

What is the purpose of the stock market?

The stock market is one of the most important sources of raising money for most business institutions. In a stock market, the businesses are allowed to go public in order to attract potential investors that will help in the acquisition of additional capital that will be used for a number of purposes that includes financing the operations, acquisitions and expansion of the company.

Which type of companies participates in stock markets?

The companies that participate in the activities of the stock market are publicly-held companies that span all sectors of the economy: home building, entertainment, banks, insurance companies, mining companies, casino operations business services, auomotive suppliers, software development firms, amusement parks, commercial real estate, etc.

Who participates in the activities of the stock market?

In simple terms, the participants in the activities of the stock market are the buyer and the seller, but who exactly are the buyers and the sellers? It used to be that the only participants of stock market trades were wealthy businessmen and rich investors but now, a huge number of institutions and organizations became predominant figures in the world of stock market. Nowadays, the buyers and sellers that are involved in stock market transactions include hedge funds, business corporations, commercial banks, pension funds, insurance companies, mutual funds, investor groups, and even government sectors. Through mutual funds there are millions of every day investors who are owners of stocks in significant amounts.

What happens after the company raises capital to its desired level?

After the raising of the capital, companies embark on a variety of activities including expansion/renovation of existing facilities, purchases of capital equipment and investment in human capital and investment in marketing & advertising programs. At some stage in the companies growth it shares some of its profits with the shareholders with corporate policies such as dividends and spinoff shares.

What happens if the company fails to raise the capital and loses some money in the process?

In situations wherein the company fails to raise the capital that they need to finance for the improvement of the business, the investors who purchased some of the company's stock are also affected. If the company loses money, the investors may lose money as well with a decline in the stock price. This may create a negative self reinforcing downward spiral.

What drives the activities of the stock market?

The driving force that keeps the activities of the stock market still going strong despite the inevitable risks that come along with it is the simple law of supply and demand. Investors are making continuous reassessments of the value of a company. Successful companies will be able to raise capital quickly and cheaply in the markets. Conversely poorly run companies will find it difficult if not impossible to raise capital. It is the role of investors to make sure that capital is allocated to the deserving companies that are growing and make smart investment decisions with their shareholders capital.