How Public Stocks Work

Stock prices rise and fall depending on a company's current and potential earnings.

Stock prices rise and fall depending on a company's current and potential earnings.

If you're considering investing in public stocks, you may be curious about how they work to make money for investors. While looking at stock market charts can make the process seem complicated and even confusing, in actuality the way public stocks work is fairly simple. Before you invest in public stocks, it's important that you understand how money is made and work closely with a knowledgeable and trusted broker or adviser who can help find the right stocks for you.

Significance

Stocks originate when new companies need to raise money for large investments that will make them more profitable. To raise this money themselves rather than borrowing it, they often sell shares of stock to private investors. New stock is worth almost nothing and is bought by investors who want to support the company and feel that they will benefit from owning part of it once profits begin to come in.

Public Stocks

Once the company begins to profit and wants to raise even more money in investments, stocks often “go public,” which means that the general public can buy shares. Publicly held stocks are traded through the New York Stock exchange or NASDAQ. This allows the company to generate money quickly as the public buys shares. The owner of public stock shares owns a small percentage of the company.

Public Stock Valuation

The value of a publicly traded stock is determined by how much investors are willing to pay for the shares. The price is usually decided upon by how much the investor will profit, by the company’s current earnings success and its potential for future success. If a company does not hold much promise for the future, stock prices will remain low as buyers will not be interested. When a stock is bought and sold by investors, its price is determined by how much other investors are willing to pay for it. Investors profit by purchasing stock at low prices and selling it once share prices have risen.

Considerations

Working with a broker is crucial to purchasing stock in a publicly traded company. Brokers are familiar with the markets and follow the success of a variety of stocks, so they can help you choose investments that will best suit your needs. Most investors work with a broker rather than buying and selling stocks themselves.

About the Author

Megan Martin has more than 10 years of experience writing for trade publications and corporate newsletters as well as literary journals. She holds a Bachelor of Arts from the University of Iowa and a Master of Fine Arts in writing from The School of the Art Institute of Chicago.

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