This will be an unusual insight into the role and function of the stock market. Normally you will get a definition of what a stock market is supposed to be. You will also learn some history and stuff but let me share with you from an investors point of view what a stock market is.
The stock market is a place where you can go to purchase shares of a company that you wish to invest in. You can do that through an online broker. Many brokers today offer the savvy investor who have an internet connection to purchase shares on their own. If you want to learn which is the best broker I recommend, read The best stock broker with great reliability and best commissions
Let's say you are interested in buying Apple shares. You heard its a great company with great management. It also has great products that you love. You think it may double in price in the next 5 years. You can own a piece of this company by buying the shares of Apple in the stock market. Simple as that.
The stock market is a great place for young companies to raise money. When a stock is listed for the first time on the stock exchanges, it is called an IPO. IPO stands for Initial Public Offering.
IPO is a great way for a company to seek the necessary funds to fund the many ventures that the company will get into. Let's say a private company needs to raise $5 Billion. They can get a loan but a better way and more prestigious way is to IPO the company. Today, an IPO not only raises money, it raises the prestige of the company and its founder when it is listed on the stock market. Think Microsoft, Google and Facebook.
You can read about The Biggest IPOs In US History Here
The stock market is the perfect place to share risk in a company. Not all companies that are founded are stable and prosper all the time. Many new companies go into risky businesses. If the company grows, then they stand to make money. But for every big success there are another 10 that goes bust. The people who list their company on the stock market are smart people who want to share the risk with the public.
In return for cash and a piece of the risk, investors seek growth in the stock price. If the company does well, then the investors are richly rewarded. They are rewarded with a higher share price. Its not uncommon to hear small investors who bought $50,000 worth of shares ending up with $10 million worth of stock after 10 years.
I think a few charts will be able to illustrate how magnificent picking the right companies to invest could be.
The chart above shows the stock chart of Nike, which is the well known shoe company started by Phil Knight. Back in the 1980s, you could have bought a share of Nike for as low as 0.15$. If you were one of those fortunate investors who bought in the 80s and held on to it, your share is worth $57.86 today. A mere investment of just $10,000 would balloon to $3,857,333 in today's dollars.
Let's take another well known stock today. The chart above is the chart of Facebook. Facebook IPO at around $42 and it dropped to as low at $17.55. If you had bought this stock in the low $20s or $30s, your investment would have quadrupled today. Not bad for 4 years of investing in this stock.
The next great stock I want to share with you is Amazon. In the late 90s you could have invested in this stock for $1.30. If you have bought this stock, $10,000 would have turned into 6.5 Million!
The stock market is the greatest wealth producing machine in the world. Its no wonder that young entrepreneurs today like to start a company, grow it and list it in the stock market!
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