The stock market can provide opportunities for savvy investors to increase their wealth and achieve financial independence. The inner workings of the stock market can seem like Pandora's box to the novice investor, however. An easy way to understand the stock market is to get a glimpse of why it exists, who it serves and how it works. Once you understand the stock market, you will be one step closer to becoming a successful investor.
Learn the difference between a private and public company. Companies can be organized in a number of ways. Sole proprietorships, partnerships and certain specialized forms, such as limited liability companies, are generally owned by individuals or small groups of people. Thus, they are considered private. Corporations, on the other hand, are owned jointly by a range of individual stockholders. Since anyone can purchase stock in most corporations, they are considered publicly traded companies.
Analyze the potential sources of income for public companies. Businesses can raise money in a number of ways, including earned income, debt and investment. Selling stock is one option for raising money that involves selling shares of ownership — stock — in the company to the public. Investors pay the company for the stock, and the company can use the money for whatever it wants. After selling stock, however, companies are stuck with their stockholders until they decide to sell their shares.
Be aware of investors' need to trade shares of stock to other investors, and you will see why a formal marketplace is needed. Stockholders do not all wish to hold their shares indefinitely. Some wish to recoup their investment by selling the stock to another investor. This desire gave rise to the formal stock exchange: a regulated, market-driven exchange where buyers and sellers of stock can come together and conduct transactions in safety.
Put all of the pieces together to gain a deeper understanding of the stock market. You understand that public corporations issue shares of company ownership, called stock, to investors. You understand that investors often wish to sell their shares to other people, creating a necessity for an organized marketplace. Lastly, you've learned that the stock exchange serves exactly that purpose: to bring together buyers and sellers of stock.