Why do we have the stock market? We all know that it is considered to be a great place to invest money, but why was it made and why would a business sell it's shares? The reason for the stock market is that it makes sense.
Let's look at it this way. Joe is an entrepreneur and uses his life savings to create a flower shop. This costs him $200,000 and after about a year he decides that the shop is so successful that he wants to open up another shop and continue to grow his business.
But there is a problem. Joe does not have enough money to open up another store. What can he do about it? Well one thing he can do is to sell shares of his business in order to get things off the ground. For example, if Joe's business is making $100,000 a year and a 10% return sounds like a good investment he can consider his store to be worth $1,000,000.
If he sells little chunks to investors he can raise the money from these investors. If he sells 20% of his company he will obtain the $200,000 that he needs for his company. If he sells 40% of the company he could set up 2 shops. As long as he keeps at least 50% of the company he will still control it.
The idea here is that the store will grow so that this really becomes a win-win situation. Investors benefit as the store grows and as demand for the "stock" in the store grows with it. Business owners benefit because they have more money to invest into their company. This idea of selling shares in the company to raise capital dates back to the 1600s and will likely keep going on until the future for one simple reason. It works.
Also as an investor you can check out the fundamentals of the company and can invest into many different companies so that you get to benefit from getting into strong companies and from diversification.
Let's look at it this way. Joe is an entrepreneur and uses his life savings to create a flower shop. This costs him $200,000 and after about a year he decides that the shop is so successful that he wants to open up another shop and continue to grow his business.
But there is a problem. Joe does not have enough money to open up another store. What can he do about it? Well one thing he can do is to sell shares of his business in order to get things off the ground. For example, if Joe's business is making $100,000 a year and a 10% return sounds like a good investment he can consider his store to be worth $1,000,000.
If he sells little chunks to investors he can raise the money from these investors. If he sells 20% of his company he will obtain the $200,000 that he needs for his company. If he sells 40% of the company he could set up 2 shops. As long as he keeps at least 50% of the company he will still control it.
The idea here is that the store will grow so that this really becomes a win-win situation. Investors benefit as the store grows and as demand for the "stock" in the store grows with it. Business owners benefit because they have more money to invest into their company. This idea of selling shares in the company to raise capital dates back to the 1600s and will likely keep going on until the future for one simple reason. It works.
Also as an investor you can check out the fundamentals of the company and can invest into many different companies so that you get to benefit from getting into strong companies and from diversification.
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For more on the history of the stock market visit this history facts of the stock market page.
