Companies go public by offering a specific number of shares in their company to the public through the stock exchange. Investors then can use the stock exchange to buy and sell stocks of companies that they are interested in. While this basic description of how the stock market works is adequate enough to understand what the stock market is, to get a better understanding of how it actually works it will be important to learn about some of the terms that are commonly used when discussing the stock exchange including stock prices and market capitalization. The first term that you may hear when you start learning about how the stock market works is stock prices. Stock prices are the price that a specific stock sells for. This price is set by several market factors including the health of the economy, trading trends, spending trends, and financial or technical reports put out by a company or an independent third party. The next term that you may hear about is market capitalization. Market capitalization is the value of the company or the stock that is being offered. To calculate the market capitalization of a company, or stock, simply use this formula: The number of outstanding shares X the price of the stock = market capitalization of the company. After you learn about the basics features of the stock exchange you will next need to learn how to buy and sell shares. To buy a stock you will need to establish some kind of investment account. In most cases you will open an investment account with a stock broker that works at a local firm. However, today you can also open an online investment account and make trades without the help of a stock broker. After you have set up your account you will need to fund it before you can make a purchase. Once your account is funded you will be able to enter your order for a stock purchase. When you are ready to sell your shares you will either tell your stock broker that you want to sell X number of shares of Company A, or you will need to enter a sell order via your online investment account. Once active in stocks, you will have to familiarize yourself with the following terms: With the new corporate structure in place, people begin buying and selling their shares. People invest for different reasons. Those looking for a steady return on investment may buy shares of a profitable company that issues regular dividends. Risk-takers on the other hand may buy shares of a fast-growing company (or at least one that people assume will be fast-growing someday) in hopes of selling them for a profit later. The more extreme forms of speculation are based on the "greater fool theory." You can make a foolish investment in the hopes of selling it to an even greater fool later on. 1) by selling the stock at a higher price than it was purchased at
The main purpose of the whole stock market setup is twofold: 1)a company lists or goes public, to get money from investors for use in expansion, settling debts, etc., and 2) for investors to get into and buy into companies easily, no matter how small their share size is.
You are here: Home / Stock Market & Finance / how does the stock market work
how does the stock market work
Going through the details:
After a company decides to go public, the first step it takes is to file registration statements with the Securities and Exchange Commission and wait for 20 days before the sale of stocks. When issuing the stock, a final prospectus containing offering price of the stock is brought about. The underwriter buys all the company stocks to sell them to the public. He decides the markup price for his offering. The new price holds his service charges. During that period of 20 days, the issues of stocks can be advertised. Representatives can send preliminary prospectuses containing information about why the stocks are being sold, to the customers. This paragraph was taken from buzzle.com, and 20 days may be the standard for Wall street but not for the Philippines Here, the company must wait for the SEC to approve or deny the application to issue its IPO.
Once a company goes public, the law of supply and demand takes into effect, as the market commands the price based on the number of tradeable floated shares. Hence, the more people that want to buy the stock for whatever reason, the more that the stock will go higher and vice verca.
When a business makes money, the price of its shares rises. On the same lines, if the business suffers from losses, its share prices fall. Buyers and sellers of shares are watchful about the company business. Based on the financial conditions of the business and their speculations, they decide when to buy and sell company shares. This has a large impact on the type of the market, largely influencing the economy.
Profits can be made in three ways:
2) by holding on to the stock until you get dividends, which some companies give in varying amounts, frequencies
3) by participating in a tender offer. This is a special case when another company buys a large percentage of the company of the stock you're holding. In some cases, they are required to buy the public shareholders's stock as well.
A company may continue being listed if it complies with requirements like listing fees, continued update and disclosures, financial statements, all of which varies from SEC laws of differing countries.
A company can be delisted for violation or non compliance of SEC requirements, and if the company goes bankrupt. Some exchanges follow a market capitalization rule for delisting a stock from their exchange.
Where does the money go?
1)In the first step just at the IPO phase when a company goes public, the money goes directly FROM the hands of subscribers, TO the pockets of the companies. It is like getting a loan from the bank without having to pay it back!
2)When a stock is already listed, all the buy sell trades go directly from the hands of the selling shareholder to the hands of the buying shareholder
FEES PAID
Varying stock exchanges have varying fees and amounts like VAT Value Added Tax, Transaction costs, Documentary Taxes, Sales Tax, and commissions.
Filed Under: Stock Market & Finance Tagged With: ipo, listing, offering, pse, sec, stock exchange, stock market
Comments