The Purpose of The Stock Market

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The Purpose of the Stock Market

Why are there stock markets?

People use the stock market to easily buy and sell shares in a company. Stock markets provide an easy platform for individuals to buy, sell, trade shares in companies they own.

Companies use the stock market to raise money through IPO (Initial Public Offerings). They issue usually issue common shares by way of listing their stock on one of the stock exchanges either in Canada or the US, but can issue preferred shares or warrants as well. They will do this because they need to raise money to expand their company or develop a new product, or simply pay back their debt to the banks, etc.

In exchange for shares of a company, individuals now become owners of the company and have voting rights equal to the number of shares they own. For example, if you own 10,000 shares of a company and the company has 1,000,000 shares outstanding, then you own 1% of the outstanding common shares of the company and have this much of the voting rights. Generally, public companies are very widely held with no individual owners owning more than 10-20% of the company, with a few exceptions of course! Owning common shares also entitles the shareholder to dividends if declared by the company, which can be lucrative over the long-term. Some of the big banks in Canada pay significant dividends for example (CIBC, Royal Bank, etc all in excess of $2-3 per year). This means, if you own 1000 shares, you would be entitled to $2,000-$3,000 in dividends per year, on top of any appreciation/depreciation in your stock value.

Public Companies report to their shareholders by way of quarterly and annual reporting. Annual reports are usually subject to third party audits by accounting firms such as PwC, E&Y, Kpmg, and Deloitte.

Lastly, stock markets play a crucial role in a country’s economy. More often than not, it indicates how well a country’s economy is dong or not. For example, in 2008, the stock market crashed significantly due to the collapse of Lehman Brothers and WaMu, two US banking institutions; after these events, the US economy went into deep recession and remains in recession to this day!

(C)opyright 360 Investing Guys

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