What is The Stock Market

The stock market is a place which allows businesses to raise investment from the general public. This is because when a company issues shares to the stock market, anyone can buy shares of that company.

The very first publicly traded company was the Dutch East India Company when it sold its shares on the Amsterdam stock exchange in 1602. The company needed to fund its expensive voyages which would sail all over the world to trade gold, porcelain, spices and silks. As it could not raise the funding it needed privately, it turned to the general public who could invest money to support the trip in exchange for a share of the ships profits. This allowed the company to increase the amount of voyages they could go on and subsequently increase the amount of profits they could make.

Since then thousands of companies have obtained investment from the general public to help fund the expansion of all kinds of businesses' in exchange for an ownership stake. For example, Facebook has raised $16 billion from offering shares to the public (Source: Hargreaves Lansdown).

The main reasons as to why a company would want to list on the stock market can be seen below:

Issue fresh share capital to fund the expansion of the business without having to take on debt (ie loans from a bank or from issuing bonds).

Way for the owners to profit from their venture and potentially exit the business entirely by selling their shareholding. It also provides market liquidity by allowing the owners to sell their share holding at the time of the IPO or gradually once the company is listed.

Raises the profile of the business with visibility across financial markets. Also increases its credibility with customers and prospective lenders because public companies have to comply with a number of regulations and ensure transparency when conducting operations.

When an investor owns a share of a company, they are now partial owners of that company. By owning stocks you will share in the potential successes of the companies that you are invested in. You will also share in the potential downfalls of these companies.

The two main benefits of owning stocks:

1) Stock Prices Rise over Time

As companies grow and add increasingly more value to society, the demand for their stock rises, which pushes up their price. The opposite happens when a company is struggling and might be less profitable.

The Dow Jones Industrial Average (DJIA) represents the value of the 30 largest companies in America such as Apple, Microsoft and Nike and is one of the oldest indexes in the world. Since its inception in 1896, the DJIA has risen from 41 to 36,524 points as at the end of 2021. This represents a 6.2% compounded annual growth rate.

If you had £10,000 invested in the DJIA since its inception it would be worth £17,855,551 today. Although this represents the returns of a 124.5 year investment, it highlights the power of compounding.

2) Profits made by a company can be distributed amongst its shareholders in the form of dividends

Some companies may not always pay dividends though. For example, if they decide to reinvest profits for growth opportunities or simply cannot afford to.

Essentially investing in the stock market represents an investment into the human capital of these companies listed on the stock market. Human capital is the stock of habits, knowledge, social and personality attributes embodied in the ability to perform labour so as to produce economic value. As the employees of the companies are constantly trying to add ever increasing value to society by coming up with new ideas and innovative solutions to a whole variety of problems, we will see the stock market continue to rise.

This is why investing in the stock market over the long run is an amazing opportunity, because the human race is showing no sign yet of slowing down in the advancement of new technologies and ideas that continue to increase the standard of living. This is the main reason why the stock market has risen since its inception.

Watch the two videos below explaining in more detail what the stock market is and how it functions.