Basic Understanding on Stock Market

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The Stock Market is a voting machine in Short Term. But, the market is a weighing machine in the long term.

Basics of a Stock Market
History: A long  time ago, humans ran businesses with just their money. The businesses  they ran were small and they grew the businesses only with their own  profits. However, not all businesses can be built with your own money.  What if you wanted to build a new factory that costs more than a million dollars? Banks won't lend money for young companies and your friends won't have that much.

In the 15th-16th century as the Europeans started exploring Asia and Americas, the big explorers felt they needed a lot of money and their kings were not providing them anymore. The wealthy guys demanded a lot of interest. Thus, they felt they need to raise money from a bunch of common people. Thus, in 1602, the Dutch East Indian company became the first company to issue shares of its company in the Amsterdam Stock Exchange and get traded on a continuous basis.

What is a Stock? Stocks  in a company provide you a share of the company's future profits in  return for the capital invested. For instance, if you buy 1 stock of  Apple now, you will be assured one-billionth of  Apple's profits in the  future (as there are almost a billion such stocks that Apple has issued  now).

Listing: In  a stock market, 1000s of companies are listed and these companies  (called public companies - as they have given out their shares to common  public) pay a fee to the exchanges, along with a promise to provide all  important info to the markets. In return they get an opportunity to put  their company in the stock market's board & have the ability to get  money from people visiting the market. The first time a company's stock  appears on the stock market's board is called an IPO (Initial Public Offer).


Brokers: Conceptually,  a stock exchange is similar to eBay. These guys allow companies to  be listed and connect the buyers & sellers. Since millions of people  trade in the market and it is practically impossible for these  exchanges to deal with all the individuals, they have assigned brokers who act between the exchanges and the individuals.