As an observer, it can be overwhelming to understand the stock market and how it works, for both companies and investors. We are used to seeing news images of brokers transacting across a hall, stats like images of market expectation, and a lot of uncommon terms and jargon
But despite all of the unusual images, stats and terms, the stock market is one of the easiest understandable markets to join as a beginner. One of the confusing questions observers do ask is how do companies make money from stock? This is an easy-to-understand concept.
Companies sell stock to investors for raising money. An increase in the value of these companies will lead to an increase in the value of an investment by the investor and a decrease in the value of the companies will lead to a decrease in the value of an investment by the investor.
Investing in the stock market is one of the best way to wealth for retirement. While you don’t have to be a guru to start investing in the market, you will require basic fundamental knowledge of how the market works, including how companies make money from stock. Without anything more to add, let’s start with what the stock market is.
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What is the stock market?
The stock market is a market that enables companies to raise money and investors to make money. A company offers partial ownership of the company to investors by offering them shares. When a company issues its shares, it simply spreads risk and makes money.
Since no company would have the time to look for investors, it sells its stock by registering and offering them on the stock exchange. Initial public offering (IPO) or Going public is the name called issuing of shares by a company. Through this, it creates a primary market for the sales of its shares.
Now there’s the secondary market, where investors buy and sell shares on the stock exchange. In this market, investors are not only individuals but can also be large entities such as commercial or financial institutions. And so, in the secondary market, you don’t only buy shares from companies you can also buy from individuals who already own them.
In the stock exchange market, there are usually trading hours. Trading activities can go beyond the trading hours but you should buy or sell during the stipulated trading hours. The trading hours are usually between 9:30 am to 4 pm ET.
The Youtube video below further explains how the stock market work. You can check it out the basics.
How companies make money from the stock
All the world big companies you see today once started as an idea by probably some bright genius or middle-aged man or a 70-year-old who has failed throughout his life. The point is every business start with an idea before becoming what it is today.
Take a look at Meta, Mark Zuckerberg founded the initial company Facebook in his university dorm in 2004. Jack Ma of Alibaba started his company in his apartment in 1999. All these companies were started small without a huge capital.
But huge capital is often needed to take these businesses to the next level. To get big they needed to buy machines, recruit employees, build offices or factories, buy materials, get trucks for transportation, and quite a lot more. These large amounts of resources can only be gotten from huge capital, depending on the size of the business.
It, therefore, becomes important that companies source capital and the stock market is one of the best places to get the funding for such a huge project. And there are different ways a company raises capital in the stock market.
A company can raise capital by either borrowing or selling its shares. Borrowing is also known as debt financing can be bad for a startup. This is because the company does not often possess the assets needed for the loan. Startups in certain sectors don’t possess such tangible assets as the Tech industry.
Moreover, the payment of such a loan can hinder the growth of the business especially if the interest on repayment is high. It would be a huge burden on a business that is just starting up. And this can lead to the fold-up of such a startup.
The best option for a startup is equity financing. With this method, capital is often gotten from personal savings, friends and family, and angel investors. This could help a startup up and running and as it grows more capital will be required and this is where the listing of shares comes in.
As a company grows from its birth stage, more capital would be needed and this can’t be gotten from savings, family, friends, and bank loans. A company would have to sell its shares to the public, known as Initial Public Offering (IPO).
This would guarantee a company the amount of capital it needs to continue operations. But once a company’s share is listed in the Stock Exchange market, it changes its status from a privately owned business with shareholders holding its shares to a public company with the public holding its shares.
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