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How Do Stocks Work?

How Do Stocks Work?

how do stocks work

When you buy the stocks of a company, you own a segment of the business. When a company wants to raise more money, it often issues shares via an Initial Public Offering (IPO) whereby the price of the shares is determined based on the estimated value of the company. The company is able to keep the cash raised to fund its operations while the stocks (or shares) continue trading on the regulated exchange, like the New York Stock Exchange (NYSE).

Investors and traders get to buy and sell the shares of the company at the exchange, but the company itself does not reap any monetary benefit from this kind of trading. However, the company gets money from the Initial Public Offering.

What’s A Stock?

A stock refers to a share of a company’s ownership. A shareholder is one of the many owners of a given company and is expected to receive their personal share of the earnings of the company.

Stocks provide you with a great opportunity to grow your wealth. But you need to know how stocks work so you can make wise investment decisions. Although there are no guarantees in relation to individual stocks, learning the basics can help you become a better investor.

How Stocks Are Issued

Why you buy shares, you get a stock certificate, showing that you are one of the shareholders. Originally, stock certificates were issued as physical documents, but modern stocks are issued by electronic means at a brokerage.

How to Make Money with Stocks

As a shareholder, you are entitled to a fraction of the company’s earnings. Therefore, you make money when the company makes a profit. And the more stocks you acquire, the more the amount of money you make. Money is often paid out through dividends.

You can also purchase shares, hold them for a given period of time and sell them at a profit. Here, you will receive money for the sale of the shares through a capital gain.

Understand the Basics

The stock market provides you with great opportunities to grow your wealth as an investor. However, to the beginner, the ins and outs of the stock market can be a bit complicated and something that only the seasoned investors can decipher. Thankfully, by understanding how stocks work and how you can make money through stocks, you can be sure to make sound financial decisions worthy of even the smartest investors.

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