why is there a stock market?

Amber - posted on 08/04/2011

Some companies on the stock market could get loans, but others couldn't You have to have more than a good idea for the bank to hand over their money to you, which means many won't qualify for it.



Plus, with stock, you have the option of paying dividends to your owners or reinvesting the money in your company to build more capital, advertise, research for expansion of product lines...you have many many options. With a loan, you simply pay the money back. No real option there.



An additional potential bonus is that owners are the last to get paid back in the instance that a liquidation occurs. This keeps that money from being spread out too far and allows for a higher likelihood that lenders will be paid off and liabilities won't remain.



Plus...loans increase your liabilities, which isn't great for company standing. Stocks increase owners' equity in the company. I won't go into too much detail, but this basically means that your company ratios are better (especially the current ratio which is the most common) and there is more working capital within the company.



Another big reasons that the stock market has become so important recently is the derivatives market. Derivatives are basically investments made on other investments....



It's difficult to explain, but basically some people buy an investment assuming that interest rates/stock prices will change drastically and they will make money on it. It's incredibly risky, so those people have to keep an almost obsessive eye on the market so they can sell at the perfect time.

Rosie - posted on 08/04/2011

why can't these people who start companies get a loan? the company i work for is a HUGE company that is privately owned. we are the third largest home improvement store in the country behind home depot and lowes.
i guess i just don't see how this thing is a good thing. isn't there always a way to have things work without it?

[deleted account]

It is a lot to explain in a single post, but here is the broad simple overview.

The stock market is basically created by private investors investing money into a company's idea. For a company to get started, it has to have some capital, or money to run on until it becomes profitable (used to buy the factories, pay employees to make the first products, and all that before the first products are ever sold). Typically, the person with the great idea is not the one with a lot of capital to invest in his/her idea, so that person would establish a company then invite private investors to invest in the company. Their investment would then buy them a "share" of the business and their investment should be returned in the form of business profits (they get a percentage equal to the amount of the company their investment purchased).

Without the stock market, many businesses would have never been born because the creators would have never gotten the capital. Most companies leave their holdings open to new investors, though there are limitations. Shares can be bought and sold at anytime.

Sometimes, shares can be diluted to make room for new investors, this can be very bad if you own a lot of shares that get doubled because the percentage of the company you own, thus the percentage of the profit you receive, could go down very quickly. This is okay if the company turns the added cash flow into a bigger profit, but if the new venture fails and profits go down, people can very quickly loose millions of dollars. Some companies close their holdings and do not allow new investors unless they need more cash flow.

The reason it effects our economy so much is because the profit of the shares reflect our spending. Also, the $$ that pays the wages of all the workers comes from the stock market (in companies that are traded there). Basically, the stock market is a way for companies to get the funding they need, and for private investors to make money without having to come up with an original, profitable idea.

Does that make sense? I can go more in depth if you have some more specific questions. I can't really thing of what else to say at the moment.

[deleted account]

I'd be interested to learn that too, I never really thought about why we have stock markets, I just assumed it was so we could keep a check on how big businesses were doing as they affect our economy, by employing people and spending money in our economy etc.