For many beginners, the world of investing seems confusing, and one of the most common questions is: how do stocks work? Stocks are the foundation of the stock market and a powerful tool for building long-term wealth. Let’s break it down in simple terms.
What Are Stocks?
A stock represents ownership in a company. When you buy a stock, you’re purchasing a small piece of that company, called a share. This makes you a shareholder, meaning you have a stake in the company’s success (and sometimes its risks).
How Do Stocks Work?
Stocks work on a simple principle: companies raise money by selling shares, and investors buy those shares hoping they will increase in value.
Here’s the process:
- Company Issues Shares
- A company lists shares through an Initial Public Offering (IPO).
- The money raised helps the business grow.
- Investors Buy and Sell
- Investors purchase shares from the stock market through exchanges like the NYSE, NASDAQ, or NSE/BSE in India.
- Prices move up or down based on demand, performance, and market conditions.
- Value Goes Up (or Down)
- If the company performs well, demand for its shares usually rises, increasing the stock price.
- If it struggles, the stock price may fall.
- Profit for Investors
- Capital Gains: Selling stocks at a higher price than you paid.
- Dividends: Some companies share profits with investors in the form of cash payments.
Why Do Companies Sell Stocks?
Companies sell stocks to raise funds for:
- Expanding operations
- Launching new products
- Paying off debt
- Hiring employees or investing in technology
Instead of borrowing from banks, companies use stocks to access capital from the public.
Why Do People Buy Stocks?
Investors buy stocks to:
- Grow their wealth over time
- Beat inflation with higher returns
- Earn dividends
- Become part-owners of successful companies
Example: Stocks Made Simple
Imagine you and three friends start a bakery worth $10,000. You divide it into 100 shares, each worth $100.
- If you buy 10 shares, you own 10% of the bakery.
- If the bakery grows to $20,000 in value, each share is now worth $200.
- Selling your 10 shares gives you $2,000—double your investment.
This is essentially how stocks work in real life, just on a larger scale.