The
STOCK
MARKET
The stock market is a market for the trading of stocks and shares in companies. These include securities listed on a stock exchange as well as those traded privately. A stock market is sometimes also known as an equity market. In layman’s terms the stock market is a place where individuals or companies can buy, sell and trade stock for public owned companies.
What are Stocks?
A stock is an investment. When you purchase a company’s stock, you’re purchasing a small piece of that company, called a share.
Stocks are securities that represent an ownership share in a company. For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time. People who own stocks are usually referred to as shareholders.
While a piece of stock, also known as a share, represents ownership in a company the percentage of ownership from a single share is so small that it is basically insignificant. Most companies that are listed on the stock exchange issue ten or even hundreds of millions of stocks. With the exception of the founders of companies, most people or even institutions usually own only a small percentage of a company’s stock.
How Stocks Make People Money
Stock generates money for their investors in two ways, through dividends or through an increase in the value of the stock. Most stocks that people can buy offer dividends, which are usually quarterly payments by a company to its shareholders that come from the company’s profits. The other way that people can earn money from stock is by selling the stock to another person or entity when the stock price has gone up in value which has the possibility of selling for many times over what the individual initially bought the stock for.
The stock market is considered the best and most reliable way for people to create and grow their wealth and financial assets. Over the long term investors can expect an average return on their investments in the stock market of around 10%. This means that if you invested $1000 into the stock market in a diversified portfolio over the course of 10 years you would have a return of over 150% with $2500.
The 10% return per year is based on the two most common ways that people generate wealth from the stock market, the increase in stock price for a company and through the return of dividends from stock in a company.
Why You Should Invest in the Stock Market
Editor's Note
While at times the stock market can fluctuate wildly. It is still a general best practice to keep the money you have invested in the stock market in there unless you are planning on retiring or want to use the money you have invested for something else. Unless you are certain you know what you are doing when investing money, it is always best practice to stick with the advice of professional financial advisors.
The Impact of the Stock Market
The Stock Market has a direct affect on 51% of Americans. 51% of American households own at least a little bit of stock. This stock for most people is usually owned through various pension plans and 401(k)s.
For the other 49% of Americans who do not own stock, the daily ups and downs of the stock market has almost no bearing on their lives and even the long term trajectory of the stock market as only the most indirect effects. For this half of Americans, news about the health of the stock market should be as important to them as what someone on the other side of the world had for dinner, only in extreme cases will this information affect their lives.
For the 51% of Americans Who Own Stock
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For the 49% of Americans Who Don’t Own Stock
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For those Who Own Stock
If you own stock or have set up a retirement account for yourself, you will be directly affected by changes in the stock market. However, even though the stock market has the ability to directly affect your life if you own stock the daily fluctuation of the market should not be a concern. While stock prices can fluctuate greatly on a minute by minute basis unless you happen to own a supercomputer with vast amounts of financial data you should not be concerned
with fluctuation from the market except on a quarterly or even yearly basis based on your age. Even in the event of a dreaded recession unless you planned on retiring within the next couple of years your retirement account should not take a huge, if any, loss in the long run.
For those Who Do Not Own Stock
If you do not own any stock personally and you do not have any kind of retirement account set up then the stock market can only affect you through indirect means usually through various company policies and plans. Examples of indirect affects the stock market can have is that if a company’s stock is continuously increasing in value, thus the company is generating a profit or gaining an influx of cash through investment, then the company is likely to open up more positions
to increase its market capitalization. On the opposite side however, if a company’s stock starts to lose value, which means the company is most likely operating at a loss or lower level than expected, then the company will begin with layoffs to increase in profitability by cutting costs.
Why Companies Sell Stock to the Public
Companies sell stocks to get funds expand. When people start a business, they often pay for it with personal loans or even their credit cards. Once the company grows, they can get commerical bank loans. They can also sell bonds to individual investors.
Eventually, they’ll need a more money to take the business to the next phase of growth. At that time, they will sell their first stocks, called an IPO(initial public offering). Once that happens, no single person owns the company because they have sold it to the stockholders. Since the U.S. stock market is so sophisticated, it is easier in this country than in many others to take a company public. It helps the economy expand since it provides a boost up to companies wishing to expand.
Inital Public Offering
The Initial Public Offering, also known as an IPO, is when a company initially offers shares of stocks to the public. It’s also called “going public.” An IPO is the first time the owners of the company allow the general public to purchase stock in thier company. Before the IPO the company is referred to as a privately-owned company. After the IPO the company will then be referred to as a public company. To start the IPO a must first partner with an investment bank, release all of their finances to the public before they may sell their first stock on the market and file a request with the U.S. Securities and Exchange Commission.
Step 1: Parterning with an Invenstement Bank
The first step is partnering with an investment bank to act as a middle man between the company and the potential investor. The process of an investment bank handling an IPO is called underwriting. Once selected, the company and its investment bank write the underwriting agreement. It details the amount of money to be raised, the type of securities to be issued, and all fees. Underwriters ensure that the company successfully issues the IPO and that the shares get sold at a certain price.
Step 2: Filing Paperwork with the SEC
The second step is the due diligence and regulatory filings. It usually occurs three months before the IPO. This is prepared by the IPO team. It consists of the lead investment banker, lawyers, accountants, investor relations specialists, public relations professionals, and SEC experts. During this step the company and the investment bank work together to make the company look as inticking to potential investors as possible. This process usually involves identifying, then selling or writing off, unprofitable assets, finding new ways to generate revenue, and even hiring new management for the company.
Step 3: Price Evaluation
The third step is pricing. It depends on the value of the company. It also is affected by the success of the road shows and the condition of the market and economy. After the SEC approves the offering, it will work with the company to set a date for the IPO. The underwriter must put together a prospectus that includes all financial information on the company. It circulates it to prospective buyers during the roadshow. The prospectus includes a three-year history of financial statements. Investors submit bids indicating how many shares they would like to buy.
Step 4: Initial Public Offering
Once the company has gotten all of it’s paperwork filed and have decided on an initial price, the company finally enters into the IPO. At this stage the investment bank gives a check to the company based on how many stocks the company wants to sell. The investment bank essentially underwrites the IPO, meaning that if the stock price goes up right after the IPO then the investment bank makes money on the transaction. However, if the stock price goes down then the investment bank stands to lose money on the transaction. If the company that is participating in the IPO is big enough or has a substantial public presence then they could be asked to ring the opening bell at the New York Stock Exchange on the day of their IPO, signalling that the stock market is open.
Step 5: Entering Into the Stock Market
The fifth step is stabilization. It occurs immediately after the IPO. The underwriter creates a market for the stock after it’s issued. It makes sure there are enough buyers to keep the stock price at a reasonable level. It only lasts for 25 days during the “quiet period.”
Step 6: End of the IPO
The sixth step is the transition to market competition. It starts 25 days after the IPO, once the quiet period ends. The underwriters provide estimates about the company’s earnings. That assists investors as they transition to relying on public information about the company.