How Do Stocks Work?

A financial instrument known as a stock is used to symbolise ownership in a business or organisation and a proportionate claim to its assets and profits.Shares or equity are other names for stocks.When a shareholder holds stock, they are effectively owning a percentage of the firm equal to the number of shares they have relative to the total number of outstanding shares.As an illustration, a shareholder having 100,000 shares in a firm with a million outstanding shares would own 10% of the company.The majority of businesses have millions or billions of outstanding shares.

Stocks are also called shares or a company's equity.

The two primary categories of stock are preferred shares and ordinary shares.

Since common shares have a far higher market value and trading volume than preferred shares do, the word “equities" is often used to refer to them.

The primary difference between the two is that, whereas preferred shares often do not have voting rights, common shares typically do, allowing ordinary shareholders to participate in company meetings and elections.The reason why preferred shares are thus titled is because preferred shareholders get dividends and assets before common stockholders in the event of a liquidation.

Why Businesses Issue Stock

Many of the large corporations of today were once begun as visionary founders' tiny, private businesses.

Consider how Jack Ma started Alibaba (BABA) from his Hangzhou, China, apartment in 1999 or how Mark Zuckerberg started the first Facebook (now Meta) from his dorm room at Harvard University in 2004.Within a few decades, firms like these technology behemoths rose to the ranks of the largest in the world.However, such rapid growth necessitates the availability of enormous amounts of cash.An entrepreneur has to do a number of things before their concept may go from their head to a functioning business, including renting space for an office or factory, hiring staff, purchasing raw materials and equipment, and setting up a sales and distribution network.Depending on the size and breadth of the company, these resources need a considerable investment.

Demand and Supply in the Stock Market

The real-time application of the rules of supply and demand may be seen in a fascinating way on the stock market.

There must always be a buyer and a seller in a stock transaction.

The stock price will trend upward if there are more buyers than sellers of a certain stock due to the unchangeable rules of supply and demand.On the other hand, if there are more sellers than purchasers of the stock, the price will move lower.The gap between a stock's bid price and its ask or offer price, also known as the bid-ask or bid-offer spread, is the difference between the highest price a buyer is prepared to offer for a stock and the lowest price a seller is willing to sell it for.

Either a buyer accepts the ask price or a seller accepts the bid price to complete a trade transaction.If there are more buyers than sellers, they could be ready to increase their offers to buy the stock.As a result, sellers will increase their asking prices, driving up the cost.

If there are more sellers than buyers, sellers could be ready to accept lesser offers for the stock, and buyers might do the same, driving the price down.

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