Why We Have A Stock Market? PDF Print E-mail
Written by Shaun Rosenberg   
Monday, 14 June 2010 20:09
The stock market has been around for a long time, but why do we even have it to begin with? We have the stock market simply because it makes sense and it helps businesses to grow and prosper.
by ShaunRosenberg


The stock market has been around for a long time, but why do we even have it to begin with? We have the stock market simply because it makes sense and it helps businesses to grow and prosper.

Let's look at it this way. Joe is an entrepreneur and uses his life savings to create a flower shop. This costs him $200,000 and after about a year he decides that the shop is so successful that he wants to open up another shop and continue to grow his business.

However there is a little problem here and that is the cost. Joe already spent his life savings setting up the first shop. Now that he wants to open up a second one he needs to get that money somewhere. Well one thing he can do is to sell shares of his business. If his business makes $100,000 a year he might consider it to be worth about $1,000,000.

If he sells little chunks to investors he can raise the money from these investors. If he sells 20% of his company he will obtain the $200,000 that he needs for his company. If he sells 40% of the company he could set up 2 shops. As long as he keeps at least 50% of the company he will still control it.

The idea here is that the store will grow so that this really becomes a win-win situation. Investors benefit as the store grows and as demand for the "stock" in the store grows with it. Business owners benefit because they have more money to invest into their company. This idea of selling shares in the company to raise capital dates back to the 1600s and will likely keep going on until the future for one simple reason. It works.

And as an investor if you are able to pick the right stocks you can make a large return by investing into companies with great fundamentals and that are likely to grow in the near future.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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