How does the Stock Market work?
A stock market is a public place where stocks can be bought, sold, and issued. This can happen on a exchange or over the counter. Stocks, also called equities, are a share of ownership in a company. The stock market is where capitalists can buy and sell shares of ownership in companies. People think that a good stock market is important for economic growth because it lets companies quickly get money from the public.
What the Stock Market Is for
There are two very important things that the stock market does. The first is to give companies money that they can use to run their businesses and grow. Suppose a company sells 1 million shares of stock at $10 each at first; in that case, that gives the company $10 million in cash that it can use to develop its business. By selling stock instead of borrowing the money it needs to grow, the company can avoid getting into debt and paying interest on that debt.
The stock market also gives investors (people who buy stocks) a chance to share in the profits of companies traded on the stock market. There are two ways for investors to make money when they buy stocks. Some stocks pay regular dividends (a given quantity of money per share of stock someone owns). When investors buy stocks, they can also make money by selling them for more than they paid if the stock price goes up from when they bought it. A company’s stock, for instance, can increase in value by 50% if an investor buys shares for $10 each and the price rises to $15 per share.
The history of trading in stocks
Even though stock trading began in Antwerp in the mid-1500s, most people think that modern stock trading began in London with the trading of shares in the East India Company.
When trading investments first started
During the 1600s, the British, French, and Dutch governments gave charters to several companies named “East India.” All goods from the East had to be brought back by sea, which was dangerous because storms and pirates were common. To reduce these risks, ship owners often looked for investors who would put up money as collateral for a trip. In exchange, investors got a share of the money made if the ship made it back to port with goods to sell. These are the first examples of limited liability companies (LLCs), and many of them only lasted long enough for one trip.
The East India Company (The EIC)
When the East India Company was started in London, it eventually led to a new way to invest. Importing companies started selling stocks that gave investors a fractional ownership interest in the company. This meant that investors could get investment returns from all the voyages a company funded, not just from one. With the new business model, companies could ask for bigger share investments, making it easy for them to add more ships to their fleets. Investing in these companies, which were often protected from competition by royally-issued charters, became very popular because investors could make a lot of money from them.
The First Stocks and the First Stock Market
Company shares were written on paper so that investors could trade them with each other. However, there were no regulated exchanges until the London Stock Exchange (LSE) was founded in 1773. Even though there was a lot of financial trouble right after the LSE opened, exchange trading as a whole was able to survive and grow throughout the 1800s.
NYSE History: A Brief Overview
The New York Stock Exchange, which started in 1792, is where you want to be. Even though the Philadelphia Stock Exchange (PSE) was the first on U.S. soil, the NYSE quickly grew to become the most important stock exchange in the U.S. and then globally. The NYSE was in a good location because it was near some of the biggest banks and companies in the country, and it was also in a major shipping port. The exchange made it hard to list shares and initially charged pretty high fees. This helped it become a wealthy institution quickly.
Exchanges and OTC: The Trading of Stocks
Most stocks are traded on exchanges like the New York Stock Exchange (NYSE) or the NASDAQ. Stock exchanges are markets where investors can buy and sell stocks. Government agencies, like the Securities and Exchange Commission (SEC) in the United States, keep an eye on the stock exchange market to protect investors from financial fraud and ensure the market runs smoothly.
Even though most stocks are traded on exchanges, some are traded over-the-counter (OTC). When this happens, buyers and sellers of stocks usually do business through a dealer or “market maker” specializing in the stock. OTC stocks are stocks that aren’t listed on exchanges because they don’t meet the minimum price or other requirements.
OTC stocks don’t have to follow the same rules for public reporting as stocks listed on exchanges, so it’s not as easy for investors to get good information about the companies that issue these stocks. Most OTC stocks are traded much less often than exchange-traded stocks. Investors often have to deal with big differences between the bid and ask prices. On the other hand, stocks that are traded on an exchange are much more liquid and have relatively small bid-ask spreads.
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