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What are Stocks and How Do They Work

What are stocks?

Hi, Friends, I have written a very simple,  short & precise article on what are stocks? It will clear your concepts on the term stocks, Keep reading.

Imagine you founded a company. You had a good idea and some money to implement this idea. For example, by producing a product or providing a service. The business is going well and you want your company to grow. At first, you get money from the bank, a loan. Or you can find funding or a wealthy investor who provides the money at your risk. And so the company grows further and even throws profits (this is by no means self-evident in the start-up phase).

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How Stocks work

You can now, of course, try to put aside your money for new acquisitions. This takes, on the one hand, on the other hand, it may not bring the amount of money you need. Up to this point, it’s usually like this: You put the money yourself into your company, cancel all profits, but also carry all risks. Now you can consider converting your company to a stock company. The total value of everything you own is calculated. Then you can decide to sell a certain part of your company. A share is a share and everyone who buys a share becomes your shareholder.

As long as your shareholders hold their shares, the paid money is available to you as an entrepreneur. If someone buys 1,000 shares for ten euros the piece, you get simplified to say 10,000 euros at your free disposal. Since there are fees and rules, but this leads to too far at this point. For the fact that the shareholders provide you with money, they usually have a right to vote, so they can have a little say about how your company is going. In any case, you must openly tell them how your business is running and what is to be expected. This is how it works if you offer your shares on the stock exchange.

In Stock Exchange everyone can buy and sell. When many people buy shares of your company, their price increases, the stock market price. If people sell their shares, the price drops. Since the shares are part of your company, the share price also drops and increases with the shares. If the stock of 10 euro is suddenly worth 100 euros, many investors, of course, takes the profits and sell. Sudden sales are not necessarily a bad cause. Thus the stock prices fluctuate daily for various reasons.

So that people prefer to buy your shares and especially hold on, if they rise for a longer time, you can as a stimulus from your profits a small compensation payment. This is called dividend. You commit them for a period of time and pay them to your shareholders.

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About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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