answersLogoWhite

0


Best Answer

It's supposed to be a source for U.S. businesses to raise capital and grow the economy. In this function it is broken, it doesn't work.

Naked shorting and other abusive practices have made the Stock Market one big, rigged, ponzi scheme.

Currently banking stocks are being shorted by the big bucks guys so bigger banks can gobble them up with your tax money (the bailout funds).. Rep. Kucinich is investigating as this just happened to a major bank in Cleveland.

AnswerLet's do this by example. Let's say you are the owner of a company that is worth $10 million. You want to share the risk (and rewards) of doing business so you decide to 'go public'. You then decide to divide your business net worth ($1m) into 1 million pieces (shares). You then decide to sell 900,000 shares to the general public on the stock exchange. Simple math places the initial offering price of your shares at $10 each. You then have an 'Initial Public Offering' (IPO) where you sell the 900,000 shares with a starting price of $10. Your business is now $9 million richer in cash but you are no longer the boss but working for the share holders. Generally cash generated by IPO's are used to expand the business, cancel debt, etc. As time progress your business makes money and/or loses money. If you make a profit your business decides how much of that profit is retained to invest in the business and the remainder is divided up among the share holds. Let's say in the first quarter after your IPO, your company made $100,000 in profit that will be given to the shareholders in the form of a dividend. Since there are 1million shares outstanding each share holder will get $.10 times the number of shares they have. You will receive $10,000 because you kept 100,000 shares. The value of a business can be determined by multiplying the number of outstanding shares (1m) times the current share market price. If the business made money and purchased assets and such, then the value of the indiviual shares will grow. If the company loses money the value of the shares fall. The buyers and sellers of the shares of your business are watching the value of your business to determine when to buy and when to sell which is all based on how they think your business will perform in the future. Buy a low priced share of a business that makes good money and the share value goes up, divindens are paid and you sell your stock at nice profit. Buy a high priced stare and the business falters and share values drop and no dividends are paid and you lose money.

There ya go... as short and simple and I can make it. Hope this answers the question.

AnswerIt's a little more complex than that. That's not bad, though.

A corporation can get money for something like a plant expansion in three ways: it can go to the bank and borrow it; it can borrow it by selling bonds; or it can sell part of itself by issuing stock. Bonds and loans are a subject for another day.

There are two kinds of stock: initial issue, and secondary market. In an IPO, the company whose name is on the stock certificate says "for x number of dollars you can buy y percent of this company." It normally isn't a very high percentage per share--calculate the percentage if the company puts 50 percent of itself on the market as an issue of 100,000 shares.

Most investors don't get to buy into IPOs--these are largely for institutional and accredited investors. One of the big reasons is brokerages require investors to hold IPO shares for sixty to ninety days, to prevent short-term profit taking.

The secondary market is where the real action is--brokerages buy and sell "used" stocks, and the company whose name is on the certificate never sees any of this money. When you buy a used Ford, Ford doesn't get any of this money and shouldn't; the car doesn't belong to them anymore. Same deal here.

Let's buy some Dresser stock and see how this goes. They make Wayne-brand gas pumps, among other things. They compete with Veeder-Root, who makes Gilbarco gas pumps. At the opening bell today, both stocks cost $25 per share and are stable because a gas pump company really makes its money selling parts--the pumps themselves can last for decades. Today at 11am, Dresser announced a new line of drink cases and entry doors for convenience stores that they will build in a factory they just broke ground on. Veeder-Root does not announce this. Investors realize this means a person who builds a new convenience store can either call Gilbarco, plus a refrigerated-case company, plus a door company to get all her equipment...or she can call Wayne and get everything she needs from one firm. Investors in Veeder-Root may start selling their stock so they can buy Dresser instead. As they sell, the brokerage will start to get overloaded, so it does what any merchant does and cuts the price to encourage buying. At the same time, the brokerage that has the Dresser stock knows there's not enough of it to go around, so it starts raising the price. This has two effects. First, to a limited extent stock follows a demand curve--the higher the price, the fewer people want to buy it. This also encourages people who bought the stock already, but who don't necessarily invest long-term, to cash out and realize a profit. Eventually the stock reaches an equilibrium.

What about Veeder-Root? Gilbarco and Wayne both make good pumps, and it wouldn't take much for Gilbarco to beat Wayne--all they need do is have Gilbarco-brand doors and cases made for them--the lower-priced Veeder-Root stock will find buyers. When Veeder-Root comes in the next day and announces they've cut OEM deals with leading makers of doors and cases and that Gilbarco doors and cases will be available immediately, the tables are turned: Dresser has a piece of land on which convenience store cases will one day be made, but Veeder-Root has a complete line of equipment that people like already. Today Veeder-Root stock will get stupid expensive and Dresser will go down.

Fast forward two years. There are 600 new convenience stores with Gilbarco cases, doors and pumps. Wayne no longer has first-mover advantage, and they know it. They retaliate by introducing a case that holds twice as many sodas as Gilbarco's case does, in the same amount of floor space, and that tells the clerk when it's time to restock. Wayne receives 400 orders in the first three months it's on the market, so their stock rises and Gilbarco's falls (because Gilbarco is seen as "behind on technology").

There's also the stock split. A stock price that's too high is bad, m'kay? Fewer people can afford to buy $100 stock than to buy $50 stock, and a small percentage decline on a high priced stock looks worse than the same decline on a lower-priced one. (If you have two stocks--one priced at $100 and one at $20--a 5 percent decline on the expensive stock brings it down to $95 per share, but the same 5 percent decline on the less expensive share is only a dollar.) If a stock is outrageously expensive, the company has the option of doing a "stock split." These will be listed as "3 for 2" or "10 for 1" splits. If your company does a 5 for 1 split and the stock currently trades at $500, every $500 share will become five $100 shares--same market capitalization, but spread out over more shares.

Answer

It does seem like a bit of a Ponzi scheme. The only reason to buy a non-income stock is because you expect someone will want to buy it later for more money. Since most companies choose to reinvest profits in the business rather than pay them out as dividends, the companies gain a lot of money (through their IPO) without paying much back in return.

The basic function of the stock market is to provide capital resources for corporations that seek capital to expand their operations and finance their growth.

If you make your money available to theses companies, you help them expand and prosper.

Companies that issue stock shares to the public are considered "publicly held" or "publicly traded" companies. Stock shares represents ownership of a corporation. As a shareholder, an investor owns a portion of the company's assets and profits.

With ownership comes risk and a shareholder assume the primary risk if a business does poorly. However, they also stand to make the greatest return if it succeeds. If he is smart, the shareholder would be wise to be understanding the stock market too.

When an entrepreneur starts a company, he often looks to family and friends for start-up capital. As the company grows, it will need more money, or in other words capital. Those who survive those tough early years, when most businesses fail, will look for a bank loan.

Loans carry high cash costs, in the form of interest payments. Eventually, if the company grows enough, its owners may choose to issue stock shares in the public markets. Understanding the stock market is very important to know for these entrepreneurs.

When you hear that a company is "going public", it means that the company is issuing shares of ownership for sale in the public marketplace. This process takes place during the initial public offering, or IPO.

The IPO is a first-time offering of stock for sale to the general public. The IPO process involves a number of people in addition to the company owners, and can be a rather complex undertaking. The company itself must be clear in understanding the stock market.

To go public and issue an IPO, the company must use and find an Investment Banking firm that is willing to underwrite the public offering. The Investment Banking firm, or underwriter, will do their best to sell the shares. They may reserve the right to sell the offering on an all or none basis, which means that if they cannot find buyers for all the shares to be issued, they may call off the entire offering.

The underwriter's profit in this case is made by a commission charged for selling the stock. If the underwriter agrees to a firm commitment to sell the entire offering, usually the first move is to buy all the shares that are going to be publicly offered at an agreed-upon price.

The underwriter then attempts to sell those shares to the public for a higher price, thus profiting from the transaction.

User Avatar

Wiki User

โˆ™ 2011-09-12 22:10:36
This answer is:
๐Ÿ™
0
๐Ÿคจ
0
๐Ÿ˜ฎ
0
User Avatar
Study guides

Resume Writing

20 cards

How do you get my remmittance in social security system

What is the best definition of a targeted resume

What happenes to teenagers who get insufficient sleep

What is the best definition of a special e-version resume

โžก๏ธ
See all cards

Business & Finance

20 cards

An accounting code structure consists of which elements

What must be in place before you create an accounting validation control

How can you link the values of two accounting code segments

How can you set up the system so that cardholders can reallocate only one specific accounting code segment

โžก๏ธ
See all cards

Economics

20 cards

What allows only a certain quantity of an item to be imported

Which organization was founded in 1995 to promote trade between nations

Which nations were the world's leading exporting nations during the mid-1990s

Which term is defined as goods sold to other countries

โžก๏ธ
See all cards

Add your answer:

Earn +20 pts
Q: How does the stock market work?
Write your answer...
Submit
Related questions

Where can an economist work?

A stock market place or a stock company


What is stock markeet how it work?

stock markeet is a market where shares are sale and purchase


People work in a stock market?

Brokers.


What is the difference between a stock exchange and the nasdaq stock market?

The NASDAQ is a stock exchange.It would be like NASDAQ is to Stock Exchange as Yankees is to Baseball Team.The term STOCK MARKET generally is used to describe a group of exchanges, but that is a loose usage.For example, a friend my say, "I work on the Stock Market" or "At the Stock Market", but saying I work on the NASDAQ gives you more specific info on exactly what exchange on the Stock Market.


How does stock market trading work?

Companies sell their shares of stock at a stock market. Some examples of major stock market or stock exchanges in the United States include New York Stock Exchange, American Stock Exchange, and National Association of Securities Dealers. All the stocks are traded electronically.


What does stock market trading entail?

Stock market trading entails knowledge of stocks and how stocks work. It takes watching and knowing when you "get out." It is important to know different strategies and tricks in order to have success in the stock market.


How do you find a job in the stock market?

In order to work in the stock market, it will be best to get a degree in finance or economics, preferable both. This will give you the well rounded knowledge to become a stock broker or financial advisor.


How do you do stock trading in India?

Stock trading in India is quite different compare to other countries, Investing in Indian stock Market can be either a complicated affair or an easy job. It all depends on your interest and knowledgeable about the share market. A certain tactics can work, and it can be the strategy sanctioned by stock market professional.


What is the market capitalization of the Indonesia Stock market versus US Stock Market?

The US stock market is much larger than the Indonesian stock market.


Where can one find information on stock market strategies?

A good place to find stock market strategies is on finance and business websites. Yahoo has a finance section that offers lots of information on the stock market and helps you determine strategies that work with your current economic situation.


How does Dow Jones work concerning the stock market?

cuase maybe he wants to


CNN Stock Market operates on which days of the week?

CNN Stock Market operates every day of the week. CNN Stock Market offers information on the latest news and trends on the stock market with stock quotes.


What is pdf in the stock market?

PDF in the stock marketworld is about your stock market profile. More information on the stock market and investment related terms can be referred to your portfolio.


During the 1990s the stock market?

During the 1990s the stock market boomed.


What ended the bull market in 1929?

The depression ended it in October of 1929. The stock market crashed, banks failed, and people were out of work.


What was name given to the collapse of the stock market?

Stock Market Crash BYSOS - India's Foremost Stock Fantasy Gaming Platform bysos.in


What do NaN means in the stock market?

BYSOS - India's Foremost Online Stock Fantasy Gaming Platform bysos.in


Where can someone find some good stock market picks?

BYSOS - India's Foremost Online Stock Fantasy Gaming Platform bysos.in


Most stock holders who made money on the stock market .?

Most stock holders who made money on the stock market?


Is the Indian stock market independent?

Yes Indian Stock market is independent. BYSOS - India's Foremost Online Stock Fantasy Gaming Platform bysos.in


What is meant by VSE Market Watch?

VSE Market Watch is a Virtual Stock Market to be able to watch the Stock Market virtually. Which means you can go online and watch live results on the Stock Market.


What is the stock market regulated by?

How stock market is regulated in different forms?


Questions related to the stock market?

The knowledge of stock market is a vast field and it needs to be kept updated with the passage of time. A simple definition of stock market is that "A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately".


What is stock symbol for Spotify?

Spotify is not on the stock market. With it not being on the stock market it is a privately held company.


Where is the largest exchange in the Canadian stock market located?

The largest exchange in the Canadian stock market is located in Toronto, Canada. The name of the largest Canadian stock market exchange is Toronto Stock Exchange.