Stock Investing

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Why Is There A Stock Market?

Imagine you've had a wonderful business idea - an idea you're sure will make you millions. To get it off the ground, you need $100,000 but, sadly, you only have $10,000. You describe your idea to nine of your friends. They are so impressed that they each invest $10,000 in your new company.

Each of you now owns ten percent of a new corporation. You and your friends each own one $10,000 share in your corporation. This entitles each of you to ten percent of its profits.

After three years your corporation has done fantastically well. It is making an annual profit of $1,000,000. Each friend is entitled to ten percent of this profit, $100,000 per year.

This is exactly how the stock market works. Businesses issue shares to raise money for expansion. People buy the shares in the hope that the business's profits will increase and hence the price of the shares will also rise.

Looking at our example, each $10,000 share is now producing an annual income of $100,000. Any of the friends who decide they want to sell their shares will be able to sell them for much more than their initial investment.