The Stock Market

A big question...

Just what on Earth is a Stock Market and how does it work?

Firstly it is important to understand that a stock can also be referred to as a share.Also it isn't a tangible object but is electronic. Therefore forget ideas about a stock being how many cans of cola a shop has left! That is a different meaning of the word altogether. Today we are looking at the financial product meaning.

 A large company may decide that in order to raise capital for expansion it will sell stocks on the Stock Exchange as opposed to other sources of finance such as using profits and reserves or taking out a bank loan. However it costs the firm some of its Equity in order to raise the finance in this way. This is because the buyer of the company's stocks owns a share of that company and becomes a shareholder and now owns a tiny part of it.

The Process

So, the company (Let's use Facebook) pays a substantial fee which means that it can be floated on a Stock Exchange; in this case NASDAQ Market. Which is basically where stocks are bought and sold from numerous companies on a global scale. Other Stock exchanges also exist such as the famous New York Stock Exchange(NYSE) or London Stock Exchange (LSE). In addition it will become a PLC or Public Limited Company as anybody over the age of 18 can purchase a share of the company. 

Then an IPO or Initial Public Offering is drawn up which is the amount each individual share will cost following the flotation. When the opening bell sounds and stocks are sold to eager investors and the public, Facebook in this example gets to keep the capital raised from the sale in exchange for stocks in the Facebook business. This is desirable for shareholders because they hope that the value of their share will grow. I have no doubt that you have all seen the famous charts of a stock's price constantly fluctuating with the market forces of supply and demand ( When there is high demand but decreasing supply the price is forced up for example) and other analysis such as when Facebook announces an increase in profit also forces it up. Of course these factors work in reverse too to bring the stock price down. A shareholder may be lucky enough to receive a dividend in the company if profits are made. This is because the investors' money is hopefully used to expand the Facebook business to bring in more advertising sales and so this profit is shared amongst all of the shareholders on top of the value of their shares (A kind of bonus for being a shareholder in that company.)

So, that is how a company and its shareholders both profit from the stock market and this happens with many other companies too. This makes the trading floor a very dynamic place. The hectic nature of stock trading is also exacerbated by other things too. For instance a shareholder may chose to sell their 100 Facebook shares on the Stock Exchange but is not necessarily bought back by Facebook. Therefore a Stockbroker finds another investor who wishes to buy 100 Facebook stocks and so sells the shares to them and will take a commission for their trouble.Therefore a third group of people profit from the Stock Market. 

As seen on TV

Another aspect that you may be interested in are the percentages, abbreviations and red or green triangles seen on the national news and on the finance pages of large websites. These come about as each company gets an abbreviation to trade under. For example Facebook is FB and Google is GOOG. Furthermore on computer screens the percentage change in the share price will be constantly updated for each company next to the abbreviation.Some sources also show the change in value physically; meaning how many cents or pence have been lost. For example: TSCO  331 pence  + 0.25 pence +0.5%

 Traditionally a stock is not displayed in dollars or pounds but cents and pence. The colorful text or triangles used are purely a visual aid. At a glance a red percentage means the price has lowered since the opening price on that day and green means a gain. The data can also be found on charts too but often a quicker way is to see purely the real-time prices. 

However on television we often see the prices for indices such as Dow Jones or FTSE 100 (Financial Times Share Index ,Footsie) which are averages of many companies. For example the FTSE 100 takes into account the 100 largest corporations listed on the London Stock Exchange and will take an average of Vodafone, Tesco and many other share prices and combine into one number. Therefore this has more significance when seeing generally how the largest companies are performing in correspondence to the Economic challenges at any given time. 

Having just finished GCSE I know that most of this detail isn't required but you can impress your teachers! I also can tell you that I still have so much to learn about the stock market. Some of this may also be relevant for studying the Wall Street Crash in History as it will give you some in-depth contextual knowledge. 

Why not try this fantastic YouTube summary?
How the Stock Market Works

Sam Wareham