How Stock Market Works

How Stock Market Works Explained

Fundamentally, stock market is an avenue for business people to meet shareholders. Other than bank loans, they now have another option to finance their businesses. They did it by offering their company’s equities in exchange of shareholders cash. The company is never required to repay the capital, but the new shareholders have a right to future profits distributed by the company.

For shareholders, they have alternatives to where they should put their money into. In the same time, they get the opportunity to participate in capital intensive businesses at an affordable price. However, unless you are the major shareholder, you don’t have enough power in deciding company’s directions.

Whenever a company decided to get listed, it needs to go through heavy regulatory compliance and reporting commitment set by the stock exchange authority. If successful, it will start selling its common shares to public investors through an Initial Public Offering (IPO).

This is what called as the ‘primary offering’, where the shares offered to shareholders are directly from the company itself. This is just the beginning of how stock market works though.

Once the company get listed in the stock exchange, you’ll find its share price start moving. Either it is moving upward or downward is depend on its demand and supply.

If demand is more than supply, the stock price will move upward, and vice versa. This is the time where other investors or stock traders start buying and selling stocks.

This known as ‘secondary offering’, where the shares offered to new shareholders are from other shareholders who previously owned the shares.

And what affect the demand and supply of the stock?

When Bloomberg reports Microsoft’s quarterly earnings as above expectations, its future profit prospect deemed to be brighter by most investors. Since more investors interested in owning the share, Microsoft’s stock price will go up as not many investors willing to sell their shares.

So, basically, when the company’s prospect deemed to be brighter, its stock price will increase as investors who want to own the share outweigh the investors who are ready to sell them; and vice versa.

This is how stock market works.In stock market, the presumed value by the investors is the one responsible to its price fluctuations.Company’s profitability, business expansion, economics evaluation and market condition are some of the factors been considered by investors in determining if the stock worth the price or not.