If you’re not knee-deep in business and financial jargon, then just the mention of the stock market can be quite intimidating. The stock market has been around for quite a while, and whether you run a business, have a job, or even work from home, you must know what it’s all about. If you just take the time out to learn the basics, you’ll find that it is extremely interesting and not too far-fetched for you to possibly play a role and buy and sell stocks yourself someday! In this article, we will explain how the stock market works, so let’s dive right in.
What Is a Stock?
A stock is a share in a company, which means a portion of this company is yours. When the value of the company increases, so does the price of your share. For instance, if a startup offers 1000 stocks and you buy 1, that means that you own 1/1000th of the company. There are two main types of stocks: common stocks, and preferred stocks. Those who invest in common stocks get to vote on who to elect as a board member.
As for preferred stock shareholders, they have fixed dividends paid to them, and in the case of liquidation, they get paid before common stock shareholders. However, they don’t have the same voting rights that come with common stocks.
Why Do Companies Sell Stocks?
When entrepreneurs have an idea, they start working on it on a small scale, but if they want to expand and become fully operational, they need a massive amount of funds so they can operate. That’s when many companies opt to sell their shares for people so they can generate the operational capital they need.
If investors think the idea that they are investing in is going to be profitable down the line, the company selling the stock can earn millions. When a company makes an initial public offering, it changes its status from a private company to a publicly-traded company.
How Does It Work?
Once a company lists its shares publicly, the values of these stocks will keep fluctuating depending on how the public assesses the value of the company’s assets. For instance, when a company starts selling its stocks on the market and people rush to buy them, the increase in demand will increase the value of these stocks. As the experts at tradingreviewers.com/blackboxstocks-review/ advise, it’s important to scan the market before buying any shares. Scanning the market will allow you to evaluate the value of the company’s shares and accordingly decide whether investing in that company is worth it or not.
For instance, some companies oversell their idea in pursuit of capital without actually working on developing the actual product. This eventually leads to a product that fails to meet expectations and, as a result, generates poor sales. Failing to make any profit eventually leads to the entire business failing which, naturally, causes their shares to drop. Shares dropping in value will lead to investors losing their money. For instance, if you buy 1000 shares for $1000 and the stocks fall 75%, the 1000 shares will be worth $250 instead of $1000, which means you’ll lose $750.
Why Does the Price of Stock Fluctuate?
The stock market is made up out of millions of investors who have their own opinions about how a company should operate. How they see a company influences their decisions when it comes to buying or selling their stocks. However, their collective decision is what determines the value of the company’s stocks. When more people buy, the stocks’ price increases, but the more people sell, the more the stocks’ prices will decrease.
In other words, when there are more buyers than there are sellers, the seller will increase their prices and the buyers will bid at a higher price to acquire the stocks. But, if sellers are more than buyers, then they will be forced to lower their prices so they can sell and the buyers will lower their bids. That’s how supply and demand work; when more people want something, its price will increase. By the same token, if fewer people want something, then its price will drop.
The stock market benefits both the investor and the company that is selling its shares. The investor will be able to make more money and the company will be able to raise the operational capital it needs to grow. Now that you know how the stock market works, you can go ahead and find a company worth investing in, and sit back and enjoy the profit.