The purpose of the stock market is for both companies and investors to make money. Starting and running a company requires cash. there are many ways to get cash. One of them is becoming a publicly traded company and selling a percentage of your ownership. That’s the business side. And it’s a business side that several prominent social media companies have taken or are about to take: that’s you Facebook, and Twitter!
But for us, the average citizens, we don’t see that side. We buy and sell stocks hoping to make money. But, obviously that’s not always not the case. Ill talk about the business side first. Which is important for any investor to know, as well if you want raise money for your own business some day.
Going Public Provides You With Cash Virtually Overnight
If you own a company, the purpose of the stock market for you is selling stocks, which is a great way to raise funds quickly. A business owner can sell up to 49% of his company and still retain ownership. It is a great way to raise funds quickly, thus you can expand your business quickly.
You must weigh the pros and cons and speak with an underwriter before doing this. An underwriter is basically someone who helps you through the whole process and in the end writes you the check. They value your company, do the market research, and finally find you investors.
The Down Side To Becoming Publicly Traded
But, obviously there is a down side. But many businesses have decided that it’s worth it. As well as not retaining complete ownership, you must also open your books to the public. When a company goes public, it offers an Initial Public Offering, or an IPO. All this means is that this is their first offer to the public to buy part of their company. The underwriter works with the business owners to decide how many shares to sell and at what price.
At a later date the company can sell more or buy back some of they’re stock, thus increasing or decreasing they’re ownership in the company. When a company feels like they’re value is going to go up, it is wise for them to buy back shares. The public knows this, thus it increases the investors’ faith in the company and usually the remaining shares up.
Don’t get this confused with insider trading. You are not allowed to trade based on information that is classified or has not been released to the public yet. This rule applies to company owners, employees, or the general investor. So basically, everyone. I’m sure you wont come into this situation. But just in case you do, its better to not make that extra money, than wind up in jail.
Why Buy Stocks?
When you buy a share in a company, you literally own part of that company. A share can be over-valued or under-valued. You find this by with the price per sales ratio of the stock. You find this by multiplying the number of outstanding shares by the price per share. This gives you the market capitalization, or the market cap. You then take that number and divide it by the company’s revenues. You take that number and compare it other companies in the same industry. This is fundamental analysis. I don’t dabble in this. But it is good to know and a useful tool.
Stocks can also be over-bought or over-sold. That is determined with the RSI oscillator, which I use every time I research stocks. I am a technical investor. That means I look at the charts of a company’s stock.
Most newbie investors first hear about studying a company’s fundamentals. That is called fundamental analysis. The fundamentals are what a company must publish quarterly in order to retain their membership on a stock exchange. This was implemented with the securities and exchange act of 1934. If investing is the purpose of the stock market for you, be safe and good luck.
Be Ahead Of The Curb
If you are an investor, the purpose of the stock market for you should be to beat the hoards of investors to buy and sell before the general public catches on.
As I said before, when you buy a stock you are literally buying part of that company. Stock value is determined by many things. One of them is what the average investor sees a stock as being worth. Thus, a stock price can be inflated or deflated, as I discussed previously. The average middle class person comes in hoards to buy a stock that looks exciting and looks like its going up. Real investors know that they can make money in an up market or a down market. Experienced investors also buy before the public catches on and sells short after the stock has become inflated and is on its way back down.
I’m not saying that you should send your money to a broker. Just Because they are professionals, doesn’t mean they are going to make you money. I’m not saying that stock brokers are your average uninformed investor. But since they trade conservatively, they usually go with the flow of what everyone else is doing. Brokers enjoy using heavily fundamental analysis. They would be good for you if you truly have no idea what your are doing and you are looking to invest in the long-run.
If you want to be a long-term investor, I do recommend fundamental analysis. But, if your looking to be an active trader, like myself, I recommend technical analysis.
So, investors making money is the second purpose of the stock market.
If You Don’t Succeed, Try Try Again
So, the purpose of the stock market basically boils down to businesses being able to get quick cash, with some sacrifices and us being able to make money by buying part of a company. Its good to know how and why stocks work. But don’t spend too much time researching this. Focus on your bottom line, which includes technical analysis and possibly fundamental analysis. The best way to learn in by making mistakes. So, do your research, get in, make mistakes, and repeat. Whatever the purpose of the stock market is for you, good luck.