What Is Stock Market?

Well since this is my first post, I’ll start by going back to the basic.

Recently a lot of my friends have started putting their hard earned cash into the stock market, buying up shares of companies. What surprised me is that most of them are just doing it because they “THINK” by putting money into the stock market and money will just keep growing and making profit out of it, without even understanding the fundamental. The irony is that they do not even understand why does a stock market exist in the first place!

What Is Stock Market?

Simply put, stock markets are places where companies are trying to sell their partial ownership to the public investor in the form of shares. Think of it as a supermarket, instead of seeing stall owners selling stuff such as food or vegetables, shares of the companies are being sold for cash to the investors (customers).

Why Do Companies Want To Sell Their Ownership In The Form Of Shares?

The main reason is that a company is selling a portion of the ownership to the public investors in exchange for cash. By gaining access to those cash, the company will be able to expand their business by doing things such as hiring more people, buying new machines and more materials to build more products. As a result, the company will make more money by selling more of those products or providing more services.

However, another underlying reason is also to let the original owners of the companies to get extremely rich by selling part of their ownership. Think about it, all the owners, who have invested so much money into setting up the business, would definitely want to make all those money back as soon as possible. By making their company going public, they can manage the company, and at the same time getting back all their invested capital. Plus, if the company is running a very very very good business, investors are willing to pay and buy the shares at any price. So, the owner, instead of getting back all their invested capital at 100 percent, they might even get it back at 500 percent or more!

Why Would Public Investor Want To Invest In the Company? 

Shares are sold at certain price, rightfully if the company is making good profit and growing consistently. The value of the company will grow, so as the share price of the company. If the share price rises significantly, the investor can make solid profit by reselling the shares to other investors. Also, some companies will also return cash to the investors in the form of dividend periodically, generating passive income for the investors.

However, if the company business is doing badly for whatever reason, share price will drop as there is a potential chance that the company might even go bankrupt! If it does happen, it is possible for investors to lose all the money they have invested.

How Would Investors Judge Whether The Company Is Doing Good Or Bad?

Public Companies are required to publish financial reports quarterly to the public. They will also hosted public general meeting where shareholders are able to attend to get to know more about the companies. Anytime, Investors can also send in questions and request for information.

 

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