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What Is The Stock Market?

20 March 2006 - Markets - Editor

For new investors, the stock market can seem confusing and elusive. But the basic concept is really quite simple. The stock market is the instrument by which company stocks are traded.

Why Sell Stock?

Companies may decide to trade stock to raise money for a variety of important functions – further research, new developments, mergers, etc. In order to reach the next level in business, a company may need extra funds beyond sales and loans, and selling shares is one of the best options.

A Real World Example

For instance, Joe's Coffee Shop and Bakery has several stores in one area, but Joe is ready to take the next step into a larger market. Joe calls an investment banking firm who places a value on his business. Let's say it's worth $200 million. That value can then be split into equal parts. Joe wants shares to sell for $20, so there are 10 million shares.

After the valuation is made, the company chooses how much stock they wish to keep and sell the rest publicly in the stock market. Joe will buy at least 51% of the shares so that he controls the company, and he'll put the rest up for sale in the stock market where investors can buy and sell stock in the company.

 


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