When it comes to investing, one of the method of investing is in the stocks market. A lot of people have become millionaires and billionaires from investing and trading in the stocks market. Did you just asked me what the stock market is? In this post I will be doing a very brief introduction into what the stock market is.
The Stock Market
The stock market is a global chain of exchange where companies come to sell part of their ownership in form of shares. Unlike the regular market, the stock market does not trade goods and services, the stock market trade securities which are financial assets. Unlike buying goods and services in the conventional marketplace, in the stock market, buying shares is like buying part of the company’s ownership. People can buy small or large amount of a company ownership and either keep the shares to make passive income or to sell them when the prices go up.
Why are Shares Sold?
Shares are sold so buyers could buy them, or is there any other reason to sell a product? Actually, Shares are a portion of a company’s ownership which founders, owners and early investors sell so as to raise more funds to expand the company. This capital funds sold on the stock exchange market is done through an Initial Public Offering (IPO) and at this point the company is said to be public since public investors can now buy part of the company’s shares. Facebook sold 421,000,000 shares for $38 per share at its initial offering and this funds were used to grow the company.
What determine the price of a company’s shares?
The Market cap of a company’s is what determine the valuation of the company with respect to the price of the shares. A lot of things can affect the price of a company shares from demand and supply, News and rumor about the company and company‘s internal growth and business performance, and so on. A rise in a company share price means profit for the investors but when a company share price becomes really big for an average to buy, the company splits the shares thereby making a person who own one share and own two at the value of one because when a share is splitted, the price also splits into two. Apple in 1980 went public and a person who bought 1 share at then will now own 56 shares currently because apple decided to split the shares due to the increase in price of shares to a level where the ordinary investor can’t invest.
People could buy the shares of a company if they see good prospect in the shares and with this, the company could start doing well. Snapchat wasn’t profitable before it went public but because people love the idea behind it, the company was able to make above $3 billion in IPO. The fact that a company promises well or uses the news to influence people’s option to buy their stocks should not be a reason to invest.
I will be ending this post on this note, investing in an overvalued company can be disastrous to the investor when the company isn’t worth the investment which could lead to a complete or partial loss of investor’s money.
This post was aimed at explaining the basis of the stock market and should be regarded as an educational material.