A guide to investing: What is a stock market? What is a public company? Why do companies list on the stock market? How do people make money on the stock market?
For most people, the idea of making money on the stock market is a glamorous but risk-laden proposition. Many believe the stock market is chaotic and random in nature; an untamed beast that could make them a millionaire or gobble up their life savings overnight.
What Is a Stock Market?
Fortunately, this is generally not true. The stock market is a platform for trading shares in publicly listed companies (PLCs). It is a place to invest money with the chance that it will appreciate faster than it would sitting in a bank account.
Of course, there is also a risk that the companies invested in do not perform well, and the investment shrinks. That is why stock selection is so important.
But before delving into that, it makes sense to know a little bit of background about the financial system. This will not only help the amateur investor make the most informed choices, it will also boost investing confidence.
What Is a Public Company?
Public companies list or float on a stock exchange for two main reasons. Firstly, they open up their share capital to mainstream investors. That means, instead of the company being owned and funded by a handful of wealthy private individuals, it is split into much smaller shares, or holdings. Shareholders own part of the company and even have a say in how it is run.
Another reason is to raise money. A publicly traded company may decide to issue, say, another million shares to the market. New investors bring new money to the table, and that funding can be put toward anything from expansion to paying off bank debt. It puts the business in a better position to grow.
There are other benefits to having a public listing. It raises the company’s reputation for a start. However, this all comes at a cost. There are ongoing stock exchange listing fees and corporate adviser fees which can seriously rack up.
How Do Stock Markets Work?
A stock market is a trading platform for both private and institutional investors (i.e. banks). The prices are determined by market makers, and fluctuate depending on the buying or selling demand.
When buying a stock, the investor is presented with two prices, like so: 15-16. The first price (15) is always lower and is known as the bid or the sell price. The second price (16) is always higher and is known as the offer or the buy price. The difference between the bid and the offer (1) is called the spread. That is how market makers generate profits.
Stock markets are only open for set trading hours each day, although the price may jump overnight when market makers adjust their opening prices. This might happen if, say, a director dies in the night, or there is a major fire at the headquarters that would interrupt business as usual.
This article is part of a series. To see more, visit:
Interpreting Financial Accounts
How To Create Stock Valuations
