Undoubtedly, a good day in a stock market can earn a profit of millions and a bad one can leave you penniless! Before we get to the working of stock market, let's understand what is a stock market, so that it gives a better idea about 'how stocks work'.
Basics of Shares and Stocks
The concept of shares and stocks, is incredibly simple! If you own a firm's share, then it means that you've gained some ownership of the firm's assets and profits. The dividend, that you get at the end of the year (generally) represents the share's part of the firm's profit.
The dividend is the payment each share holder member gets from the firm or company. Let's substantiate the definition of stocks and shares by a simple example.
Now, supposing that you can sell your business for $50,000 (the amount you invested), it can be termed as the asset worth of your business. Each of the 3 owners can own one share of the business and that also corresponds to 1/3rd of the profit (dividend). In other words, it corresponds to 1/3rd of the assets and 1/3rd of the profits.
The stock markets are registered markets where the process of selling and buying shares is carried on. In general, there are two types of stocks markets, the primary and the secondary. Firstly, when a firm is trying to sell its stocks, it's done in the primary stock market.
You must have heard of IPOs (Initial public offerings). Initial public offerings is the first time a company issues its shares. The IPOs are also used by firms who are in need of capital to expand their business. Many big firms list their IPO's so that they can get a platform to sell their shares to the general public.
Buying stocks through an IPO can be risky as the future performance of the firm can be poor, but if the firm has good potential, there are high chances of great dividends. The secondary market is commonly called the stock market, in which the past shares that have been purchased or sold are traded depending on the value of those shares.
So, did you get 'how do stocks work'? Well, this was a very simple explanation of the working of stock market. How stocks work, is certainly an interesting thing to know as directly or indirectly our economy and lives depend on how well the stock markets are doing.