How the Stock Market Works
What is the stock market?
The stock market is where people buy and sell shares of companies. When you buy a share, you own a small piece of that company. If the company grows and makes profits, your share’s value can increase — and you can sell it for more than you paid.
Why Companies Sell Stocks?
Expand Their Business: Companies often sell stocks to open new locations, hire more employees, or enter new markets. Selling shares gives them the funds to grow faster without relying on loans.
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Create and Launch New Products: Developing and marketing new products costs a lot of money. Selling stocks provides the capital to research, design, and advertise new items or services.
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Pay Off Debt: Some companies use stock sales to reduce existing loans or interest payments. Lower debt helps improve their financial stability and reputation with investors.
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Upgrade Technology and Equipment: To stay competitive, businesses need modern tools and systems. Raising money through stocks helps them invest in new technology or machinery to improve efficiency.
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Invest in Research and Innovation: Companies in industries like healthcare or tech often sell stocks to fund research projects that can lead to new discoveries or inventions.
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Build Brand Awareness: Going public can make a company more well-known and trustworthy. When people can buy its stock, it often gains more media attention and investor interest.
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Reward and Retain Employees: Many public companies give stock options to employees as part of their pay. This motivates workers to help the company grow, since they’ll benefit if the stock price rises.
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Strengthen Their Market Position: Raising extra funds through stocks can help companies buy competitors, form partnerships, or increase their share in the market.
How Trading Works:
The stock market operates through organized systems called stock exchanges, where investors buy and sell company shares. Every trade happens electronically through licensed platforms that connect buyers and sellers around the world.
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Major Stock Exchanges
New York Stock Exchange (NYSE): The largest and oldest U.S. exchange, known for listing big, well-established companies like Coca-Cola, Disney, and JPMorgan Chase.
NASDAQ: A fully digital exchange known for technology-focused companies like Apple, Microsoft, Tesla, and Google.
Other Global Exchanges: There are major markets outside the U.S. too — such as the London Stock Exchange (LSE), Tokyo Stock Exchange (TSE), and Shanghai Stock Exchange (SSE) — where international companies trade.
Why Stock Prices Change:
Company Performance
When a company reports strong profits, launches new products, or grows quickly, its stock price usually increases. Poor earnings, scandals, or strong competition can cause prices to fall.
Investor Emotions
Markets are influenced by feelings like fear and excitement. When investors panic, they sell and drive prices down; when they’re confident, they buy and raise prices.
Technology and Innovation
New inventions, trends, or industries can shift investor interest. For example, breakthroughs in AI or clean energy can make related stocks more valuable.
Economic Conditions
The economy affects how businesses perform. Higher inflation or interest rates can lower prices, while a strong economy and high employment often push them up.
Global Events
Wars, elections, natural disasters, and global news can impact markets around the world. These events create uncertainty and can quickly change investor behavior.
News and Media
Media coverage, headlines, and social media buzz can make investors react fast — sometimes before fully understanding the facts. Positive news often attracts buyers, while negative news causes selling.