why do we need the stock market
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The stock market is a system through which people can buy and sell stocks.
So, why do we need to buy and sell stocks? Pretend that I m a CEO of a company and you are an investor. My company produces 100 thingamajigs per day and we make money by selling these thingamajigs. The company is making a small profit, but I want to make more money. How do I that? It s simple: sell more thingamajigs. The only problem is that I can only produce 100 each day. If I could grow the company so that we make 200 each day, profits will go up and more consumers will be able to use our product. But it s not easy to have a company grow.
Increasing production of thingamajigs requires spending money. First I ll have to buy a new factory to make the thingamajigs. Then I ll need employees to work there. That s all well and good, but I don t have the money to do that. What I need is financial capital, a fancy term for spending money. So, how do I get it? Perhaps I can sell something. Unfortunately, other than the product itself, my company has nothing it can sell. except for pieces of the company itself. A stock is ownership in the company. If I sell stock, then any interested investor can own a small piece of my company and, in exchange, I get money for my company to spend.
With this extra money available from selling stock, I can finally afford to get a new factory and hire new workers. As a result, more people have jobs, my company makes a larger profit, and the public has more thingamajigs available to purchase. The next issue that comes up is why an investor would want to buy stock. There s a few reasons, but all relate to the idea that doing so will result in a profit. Sometimes the ownership in a company gives you a vote in company decisions, giving you some control over the company. Other times, stocks pay dividends. So, what s a dividend? It s simply a payment that the company makes to each shareholder (person who owns stock).
Additionally, if the company grows, the value of the stock goes up. Because of this, as someone who already has stock in my company, you can sell your stock for more money than you paid in the first place. If the company decreases in value, though, you can lose money. Investments carry risks but hopefully your stocks go up and you can make a large profit. TL;DR: The stock market is a system through which investors attempt to make a profit by effectively loaning money to companies. These loans help the company grow, which is good for the economy.
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