Why the Stock Market Was Born

I thought it might be fun to talk about how the stock market was born. Many people do not realize the importance of the stock market.nn The stock market was born out of necessity. It helps companies grow as well as helps the average citizen fight against inflation. nn Imagine you are a business owner. You own a restaurant that is making $100,000 a year in net profit. It works out great but you want it to grow, you can’t afford the $500,000 it cost to open up another restaurant. Suddenly you get an idea. nn You will sell shares of your company to other individuals and profit from those shares. In return the investors who buy the shares will own a percentage of the company and a percentage of the income produced by the company. nn You figure your company is worth $2,000,000 because with a $100,000 income that is 5% annual profit, many people would be willing to take that. You then divide this into 10,000 shares and sell each one for $200. nn You can now sell enough shares to open up a couple more restaurants, and as long as you keep at least 51% of the company you control the company. nn This deal also lets individuals beat inflation. By buying $200 shares of this company they can make approximately 5% on their money through their share of the earnings. They are also able to benefit as the company grows because the value of their shares will increase.nn But what if the investors wanted to sell their shares and cash out with their profits? It can be hard to find buyers when you need them. Because of this the stock market exchange was created. nn It is here that investors, traders, and money management companies can buy and sell stock. It is like a supermarket where you can find many shares of companies to buy or short. And this is the stock market as we know it today.