Importance of Stocks in Stock Market.

November 7, 2009

Stock market is an important part of the economy of a country. The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view.

A stock is a small share that represents a partial ownership of a company. Stocks are issued by companies in order to raise capitals and are bought by investors in order to acquire a portion of the company. Even a small share of the company will give the investors the right to have a say in how the company is run. Although they gain a portion of the company’s profits, investors do not carry an obligation to the company in cases of defaults or lawsuits.

Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. In fact the stock market is the primary source for any company to raise funds for business expansions. If a company wants to raise some capital for the business it can issue shares of the company that is basically part ownership of the company. To issue shares for the investors to invest in the stocks a company needs to get listed to a stocks exchange and through the primary market of the stock exchange they can issue the shares and get the funds for business requirements. There are certain rules and regulations for getting listed at a stock exchange and they need to fulfill some criteria to issue stocks and go public. The stock market is primarily the place where these companies get listed to issue the shares and raise the fund. In case of an already listed public company, they issue more shares to the market for collecting more funds for business expansion. For the companies which are going public for the first time, they need to start with the Initial Public Offering or the IPO. In both the cases these companies have to go through the stock market.

Only those companies which are listed on public exchanges like the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ) are capable of stock trading. The shares from the companies listed on public exchanges can be bought and sold on the open market. Buying a partial ownership in smaller companies that are not listed on a stock exchange is also possible but that is a very different type of investment.

An individual investor hires a broker to make transactions for him. A broker takes specific orders from the investor regarding the buying or the selling of stocks. These orders may include some specific instructions to trade at a price that the market will bear or at a price that the investor will prefer. The broker then tries to execute the investor’s orders by searching for either a buyer or a seller. The broker receives a commission on the sale.

Stocks have a lot of advantages over savings investments because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Some important company matters require voting and one stock is equivalent to a single vote. Partial company ownership also allows the stockholders to benefit from the company’s profits which are distributed in the form of dividends. These may be issued one or twice a year at the discretion of the company directors.

A prospering company causes the value of the stocks and the profits to increase while a suffering company causes the value of the stocks and the profits to decrease. Stocks, when compared with savings investments, both carry a higher risk of losing money and a higher potential of earning money. A good knowledge of the different stock markets and the various investment strategies can help investors to minimize their losses.

Get free updates in your mailbox.