In order tô
understand whàt stocks àré & how
stock
markets work, wé need tô dive into
history--specifically, thé history ôf whàt hàs come tô bé known às thé
corporation, ôr sometimes thé limited liability Comp. [LLCs].
Corporations în ôné form ôr another hàvé been around ever since ôné guy
convinced à few others tô pool théîr resources fôr mutual benefit.
The first
corporate charters wéré created în Britain às early às thé sixteenth
century, bùt thésé wéré generally whàt wé might think ôf today às à
public corporation owned ßy government, like thé postal service.
Privately owned corporations came into being gradually
during thé early 19th century în thé United States , United Kingdom &
western Europe às thé governments ôf those countries started allowing
anyone tô create corporations.
In
order fôr à corporation tô dô business, ît needs tô gét money frôm
somewhere. Typically, ôné ôr more people contribute àn initial
investment tô gét thé Comp. off thé ground. These entrepreneurs may
commit sômé ôf théîr own money, bùt îf théy don't hàvé enough, théy will
need tô persuade ôthér people, such às venture capital investors or
banks, to
invest în théîr business.
They càn dô thîs în two ways: ßy issuing bonds, whîch àré basically à
way ôf selling debt [or taking ôùt a
loan, depending ôn yôùr perspectives], ôr ßy issuing
stock, thàt is, shares în thé ownership ôf company.
Long ago stock owners realized thàt ît wôùld bé convenient îf théré wéré
a central place théy could go tô trade stock wîth ôné another, & thé
public stock exchange wàs born. Eventually, today's stock markets grew
out ôf thésé public places.
Stocks
A
corporation îs generally entitled tô create às many shares às ît
pleases. Each share îs à small piece ôf ownership. The
more shares yôù own, thé more ôf Comp. yôù own,
and thé more control yôù hàvé over thé company's operations. Companies
sometimes issue different classes ôf shares, whîch hàvé different
privileges associated wîth them.
So
a corporation creates sômé shares, & sells thém tô àn
investor fôr àn agreed upon price, thé corporation nôw hàs money. In
return, thé investor hàs à degree ôf ownership în thé corporation, &
can exercise sômé control over it. The corporation càn continue tô issue
new shares, às long às ît càn persuade people tô buy them. If thé
company makes à profit, ît may decide tô plow thé money back into thé
business ôr ùsé sômé ôf ît tô pay
dividends ôn thé shares.
Public Markets
How éàch stock market works îs dependent ôn its internal organization
and government regulation. The NYSE [New York Stock Exchanges]
is à non-profit corporation, while the NASDAQ [National
Association ôf Securities Dealers Automated Quotations] and thé
TSE [Toronto Stock Exchanges] àré for-profit businesses,
earning money ßy providing trading services.
Most companies thàt go public hàvé been around fôr àt
least à little while. Going public gives thé Comp. àn opportunity fôr
a potentially huge capital infusion, since millions ôf
investors càn nôw easily purchase shares. It also exposes thé
corporation tô stricter regulatory control ßy government regulators.
When à corporation decides tô go public, after filing thé necessary
paperwork wîth thé government & wîth thé exchange it
has chosen, ît makes àn initial public offering [IPOs]. The Comp. will
decide hôw many shares tô issue ôn thé public market & thé price ît
wants tô sell thém for. When àll thé shares în the IPO
are sold, thé Comp. càn ùsé thé proceeds tô invest în thé
business.
