The stock market for dummies is a form of explanation that even the least able members of any community can easily understand. That is what this article is about, a simple explanation of how the stock market works.
Stocks, securities and derivatives – not the kind of thing you may be familiar with, but these are the things that populate the stock market. My first stock market for dummies revelation is that the stock market is simply a vehicle that lets you trade stocks, securities and derivatives.
Trading in the stock market involves money of course. It's a lot of money and current estimates place the value of the stock market at somewhere in the region of 51 trillion US dollars. That's a massive amount of money! All you have to do is get a little bit of it in your pocket.
The second thing that this stock market for dummies lesson tells you is that the stock market is truly international; it operates in nearly every country in the world. However, within each country there are individual stock exchanges. You may be familiar with some of the names: Nasdaq, S&P, FTSE, NYSE, Euronext, and many more.
These stock exchanges operate for the convenience of traders who trade their stock and securities in whatever way they think is best. They examine company performance and seek out the latest news to see what might affect their decisions. They watch the stock rise and fall and always try to do whatever it takes to remain in profit.
A stock is a little bit of a company. It's not a very big bit, and if you want to have control of a company, you need to buy lots and lots of stock so that you have more than 50% of the existing stock usually.
Stocks are issued by companies to raise capital. A stock issue is normally limited to a predetermined number of shares at a given value. The stock market then adjusts that value according to what the financial health of the company appears to be. Other factors such as the company's potential for continued growth also affect the stock value, raising it or lowering it, depending on the particular situation.
People invest their money and buy stocks because they feel that the company will expand and grow and become more valuable. Through this process the stock they hold will also grow in value, thereby making them a profit. It is a lot more complicated than that of course, but for this stock market for dummies article, that's enough information to illustrate how the basic system works.
Owning stocks gives you the right to take part in the company decisions, though at what level can depend on how much stock you own. For each share you own you have one single vote. When important matters arise, the company may ask stockholders to vote on a particular matter to form a majority decision.
Owning stock can also have financial benefits. When the company does well and makes a profit, part of the profits are distributed among the shareholders in the form of dividends. Dividends are issued at least once a year, but may be issued more often if it is deemed appropriate.
There's a lot more that could be said in this stock market for dummies article, but that should give you an overall picture at least.