How Does the Stock Market Work?
A stock is a kind of security representing fractional ownership in a company for investors who buy the stock.
A Stock market is a place where investors or traders buy and sell shares of companies. In simpler terms, a stock market is where the stock exchange takes place.
It began in the 17th century when the Dutch East India Company used hundreds of ships to trade gold, spices, silk, and porcelain around the world. However, it was not cheap to perform this operation, as shipping is expensive.
So, in order to fund their voyages, the Dutch East India Company turned to private citizens- the individuals who could invest their money to support the trips of the East India Company in exchange for a share of the profits in ships.
This helped the company afford even grander and more expensive voyages, increasing profits for both company and its investors.
As a result, the Dutch East India Company has begun selling shares in coffee shops and shipping ports throughout the continent. As a result, the Dutch East India Company unknowingly invented the world’s first stock market.
This was the history of the stock market.
Since then, companies have been investing in themselves by raising funds from voluntary investors to support all types of businesses.
Over time, the structure of the stock market has changed, making it a more complex system today. The question is how businesses and investors are using today’s market.
So, to explain it more clearly and practically, let’s take a good example.
Let’s imagine a person decides to launch a new coffee and snacks company on the market.
So, the company owner will first advertise themselves to big investors. If the investors think the company is a good idea and can earn profits in the future, then they will invest first in the company.
And then, the investors sponsor the company’s Initial Public Offering (IPO).
This step launches the company in the official public market, where any individual or company could invest in it if they believe the business could be profitable to them and will buy a stock.
As mentioned above, buying stock means that those investors will become some owners of the company.
Therefore, investing in a company helps the company grow and prosper. As your business grows, more potential buyers will buy shares in your company, helping your company grow further.
So, as the usual market laws say, “If the demand increases, then the price of the stocks also increases.” So, the price will increase for the prospective buyers, which will raise the value of the company’s stocks for the investors who already own the stocks in the company.
This increased value for the company’s stocks will boost its market value, showing how many people are interested and willing to invest in the company’s idea.
But this can always reverse anytime. For example, suppose a company starts to seem less profitable for some reason. In that case, the downfall of the company can also happen.
So, the investors think the company’s stock value will fall; investors will sell their stocks in the hope of making a profit before the company loses its value in the market and investors get a loss in their investment.
As the demand for the value of the stock falls and the stocks are sold, the company’s market value also falls. This will put the investors who invested in the company in a state of loss unless and until the company again starts to rise and start to seem profitable in the market.
Understanding the stock market for beginners becomes very difficult. So, it’s always necessary for beginners to understand the stock market thoroughly before stepping into it.
Now, Let’s talk about the supply and demand for the stocks of a company.
Many factors influence the see-saw of supply and demand of the stocks of the companies.
The one which comes first influences the supply and demand of the stocks in the market itself, such as changes in the production technology, shifting labor costs, and the fluctuating price of the materials.
Other reasons like lousy publicity, leadership changes, trade policies, and new laws may affect the company for some or any other reasons.
All these reasons are the main reasons for the day-to-day noise in the market, which can make companies look more or less profitable and successful.
So, in the stock market, any company that appears less successful or loses value often loses its investors, which in the end leads to the company’s downfall or losing its value in the market.
The market is always unpredictable. So this is why most professionals and experts promote only reliable long-term investing in the market over trying to make quick cash just by seeing the up and down shape of the market.
Thus, getting yourself educated about this complex stock market system is the best way to invest and earn profits in the short-term or long term.
Today’s stock market has become very complex and always unpredictable. So before investing, please educate yourself about the stock market and how it works. So that you won’t lose your money in investing without gaining proper knowledge.