This is a quite text-heavy but very informational infographic that describes what a share of stock really is.
What is a stock?
All companies need money to start or grow their businesses. One way a company can raise money is to divide itself into little pieces and sell the pieces to investors through what is known as an Initial Public Offering, or IPO. Each little piece is called a share of stock. Each share of stock is entitled to a cut of the company’s profits. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business, or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. A Dividend is a distribution of a portion of a company’s earnings too its shareholders.
The value of a stock is essentially determined by the principles of supply and demand. If more people want to buy stock in Company X, the value will go up. Conversely, if few people desire to own stock on Company X, the value will decrease. When a stock is bought, the holder of that stock receives a stock certificate. Now, most traders use the Internet for paperless transactions. Most shareholders, or partial owners of the company, use a broker as a middle-man to buy the shares of stock. The broker is the one who facilitates a trade between the two parties.
After the company sells their initial stock to the public, anyone desiring to purchase shares of the company must buy them from someone who wants to sell them. This exchange is mediated by brokerages, which charge fees for facilitating trades.
A brief history of the Stock Market:
- Early 1300s: Early versions of stock trading began in France where traders would trade commodities and government securities.
- 1602: The origins of the modern stock market began in Holland at the Amsterdam Stock Exchange where the Dutch East India Company sold the first shares of stock ever.
- 1698: The London Stock Exchange was founded by John Castaing. The London Stock Exchange is still in operation today.
- 1792: The New York Stock Exchange (NYSE), the first in the U.S., was founded on Wall Street by a group of stockbrokers who wanted to organize what was a chaotic system at the time.
- 1849: The American Stock Exchange (AMEX) was established during the California gold rush and eventually included companies that did not meet the strict guidelines to be listed on the NYSE.
- 1896: The Dow Jones Industrial Average index was first listed in the Wall Street Journal, representing 12 stocks and valued at 40 points.
- 1971: The NASDAQ was established. It was the first exchange to trade stocks electronically.
- 2012: Today, stock markets exist in most all developed and some developing countries.
Why buy stock?
Buying a portion of a company means that when the company profits, so do the shareholders. Even though there is great fluctuation within the global market, time has proven that that the markets provide a consistent return over a long period of time. In July, 2012 the combined value of the world’s stock exchanges was $46.9 trillion U.S. dollars (derivatives not included). The NYSE alone represents 25 percent of the global market.
The Dow Jones Industrial Average, one of the most followed indexes, has shown significant and consistent growth over the years.