Understanding The Stock Market
So, understanding the stock market…OK…what the heck is the stock market anyways?
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 underwriters 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.Stock Classification There are two classifications of stock:
Common and Preferred.
Common stock is usually what is issued to the general public. The term common Stock doesnt carry any negative connotations, but rather indicates that it is the “standard” stock the company has offered. Common shareholders have voting rights.