When you buy a stock, you happen to buy part of the company. If a company has the need to gather money, it issues different pieces of property known as shares. The company performs an initial public offering. The share price is established according to the value the company, and so the shares are issued. The company uses the collected funds to grow its business, while shares (also called equities) are traded on an exchange or stock market.
The disadvantage of these loans is that the company has to repay with interest. With the sale of shares, the company makes money with fewer strings attached. There is no interest to pay and no certain need to pay the money at all. Something that is even better, capital financing distributes the risk of doing business among a large group of investors (shareholders). If the business fails, the founders do not lose all their money; they lose several thousand small pieces of money coming from other people who are responsible for their individual pieces.
The shares that are traded are bought and sold on a stock market. The New York Stock Exchange (NYSE) is an perfect instance of that market. We can illustrate this more easily this way: One may go to a store that sells food and everything you may need for that month. The reason for going to that particular store is because you can go to that one place and buy all different types of food you need in one stop, which is much more convenient than going to individual merchants. The vast majority of the shares are traded on different exchanges. They are places where buyers and sellers agree on prices and make transactions. Surely you’ve seen it on TV or in movies, where there are hundreds of traders shouting and signaling to others.
The NYSE is a large store to shop for stocks. The NYSE can be thought of as a large room where everyone who wants to buy and sell shares may do so with the greatest freedom. You do not have to be in New York to operate within the Stock Exchange. You can call a broker in the New York Stock Exchange, or you can buy and sell stocks online by contacting a broker or brokerage agency to take care of your business. The NYSE is the kind of exchange where much trade is conducted face-to-face on a trading venue. Orders from brokerage firms are performed by its members and they reach land brokers who go to a specific point, where they carry out trades. In this place, known as the trading post, there is a specific person whose job is to mediate the negotiations between buyers and sellers. Prices are determined by an auction.
The other way to buy shares of stock is through computers. The reason the market is still operating in physical trade is because it facilitates actions performed among buyers; this way it is possible to easily and effectively reduce the level of risk, as there are many traders working for different companies and it is in their interest to strive for the best deal possible.
The most common way to buy shares of a stock is to use a brokerage firm or professional. Brokers come in two different varieties. The full-service brokers offer expert advice and can manage your account; but that also charge a lot of money. And on the other hand, there are discount brokers that offer lower quality of personal attention, but are much cheaper.
Until recently, only the rich could afford to pay a broker, since only full-service brokers were available. But thanks to the internet, the rise of discount brokers came to be thanks to the online methods of trade.
The general notion is that the value of stocks tends to rise. The most common method of investing is to create a portfolio with different stocks, which is regarded to as diversification. The trader holds these shares for a long time, which often turn out to be profitable shares. Most of the time one is expecting the stock prices to rise. Sometimes, companies will pay its shareholders a cut of the company’s profit. This is called a dividend and is the main method of collecting profits from stocks where you have money invested. The size of the dividend depends heavily on the performance of the company as a whole; if the company is having financial trouble it is quite possible that the amount of dividends paid is heavily reduced.
As a shareholder, you own a part of the company. This means that, to some extent, you have jurisdiction about its development process. If you happen to hold enough shares, your actions can have a heavy influence on the performance of the company.