Stock Market Basics - Part 1

By Dwight Declet

What are the basics of how the stock market works?
The basic principles are not as complicated as they seem. Say you want to start a company that makes, let's say, uniforms for restaurant workers. You have enough savings to buy a small building and some equipment. You manage to get a contract to supply a small local chain and you go to the bank for a loan to start the business. You hire employees and things are going okay. A year later the business has done so well that you paid off the loan and made a small profit.
Now the local chain of restaurants has begun to expand and they need more uniforms. You now have a choice: you can borrow more money to pay for the expansion you must do or you can incorporate. If you choose to raise money through incorporating, you go through several legal steps that change the basic legal structure of the business and it becomes a "C" corp. Now you can sell stock shares of your company as a means to raise money. This would be your "Initial Public Offering" or IPO.
These are only an overview of the basics. IPO shares are sold at a set price and are generally bought by institutional investors to sell to the general public. Once they go on the open market, they do not provide any further benefit to your company. However, your company has a legal and moral obligation to operate as profitably and responsibly as possible. As the founder, you would typically keep ownership of the majority of the shares. If the business continues to grow and prosper, at some point, you might choose to sell out your ownership in the business and retire. At that point, the new owners and management would assume the responsibility of maintaining the value of the company.
As the company grows and prospers, the value of the stock should grow as well. Initially as the company grows, the basic principle is that the majority of the profits are reinvested into improving the company's assets. This means a bigger facility, upgraded equipment and more employees. As a company matures, it does not need to reinvest as much into growth. This would typically mean they would begin to declare dividends. A dividend is a cash payment to every stockholder. A stock that declares a regular dividend generally indicates fairly low volatility in the price.
While this article gives you a look at some of the basics in how the stock market works, it is by no means conclusive.
Dwight Declet has been a licensed stockbroker since 1985. He works we people planning for retirement and those already retired. Through his experience in the stock market he has helped over 700 clients successfully "grow money." You may visit his site and seek his advice at: http://prp401k.com
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