Yvonne S. Sanders

December 27, 2023 - 06:30 am

The stock market serves as a platform for companies to raise capital by offering shares of stock, providing investors with ownership rights and a claim on corporate earnings. Investors, both individual and institutional, engage in buying and selling shares on stock exchanges, where share prices are determined by supply and demand dynamics.

What is a Stock? A stock, also known as shares or equity, represents ownership in a company, granting shareholders voting rights and a share in assets and earnings. Ownership is proportional to the number of shares held in relation to the total outstanding shares. Common and preferred shares are the two main types of stock, with common shares typically holding voting rights, unlike preferred shares.

Stock Exchanges Stock exchanges are secondary markets where existing shareholders can trade with potential buyers. Companies listed on exchanges don't typically buy and sell their shares on the market. The largest stock exchanges globally include NYSE and Nasdaq. Over-the-counter (OTC) exchanges, with less regulation, list riskier stocks not meeting strict criteria.

Stock Market Indexes Indices like Dow Jones and S&P 500 aggregate stock prices, providing insights into market performance. Indices can be broad or specific to industries. Investors trade indices indirectly through futures markets or exchange-traded funds (ETFs).

Why Companies Issue Shares To fund operations, startups can raise capital through equity financing by selling shares. Companies can access substantial capital by going public through an Initial Public Offering (IPO), transitioning from private to publicly-traded status.

How Share Prices Are Set Stock prices are set through an auction process where buyers and sellers place bids and offers. Supply and demand dynamics influence stock prices, with a bid-ask spread representing the difference between the highest bid and lowest ask. Market makers facilitate trades, and electronic trading systems have replaced manual methods.

Advantages and Disadvantages of Stock Exchange Listing Listing on an exchange offers liquidity, enables fund-raising, attracts talented employees through stock options, and increases visibility. However, drawbacks include costs, regulatory constraints, and a short-term focus on quarterly earnings.

Investing in Stocks Stocks historically outperform other asset classes, generating returns through capital gains and dividends. Investors may prioritize capital gains for higher returns or dividends for income, depending on their risk tolerance.

In summary, the stock market facilitates capital raising for companies and provides opportunities for investors to buy and sell shares, with prices influenced by supply and demand dynamics on stock exchanges.