Science As Heck

How The “Modern” Stock Market Works

In 1602, the Dutch East India Company unknowingly invented the world’s first stock market. But today's stock market is nothing like its original incarnation.

I have always contemplated owning a stock brokerage firm, but my lack of knowledge of the entrails of the stock market has somehow coerced me to abandon my hope of even dabbling in small stock investments. Well, if you’re monomaniacally drawn to the idea of becoming rich through stock trading, and have no problem risking even your last penny, it would be in your best interest to first learn the basics of how the stock market works.

So how does the stock market work? To understand that, let’s first look at how it all started.

At the beginning of the 17th century, the Dutch East India Company ran a massive trading operation that involved hundreds of ships for the sole purpose of commercializing gold, porcelain, spices, and silks. To cover the expenses for their pricey expedition, the company resorted to private citizens to fund for the trip in exchange for a share of the ship’s profits.

The practice yielded good return and proved beneficial for both the company and the investors. It also allowed the company to take up even sumptuous voyages. So by selling shares in various shipping ports and coffee houses, then getting willing investors to fund for other businesses as well, the Dutch East India Company invented the world’s first stock market.

how stock market works

Today, there are many resources where you can learn about stock market from. But even with all these online courses, schools, careers and television channels devoted to providing you practical experiences about it, modern stock market is far more complicated than and significantly different from how it originally started. So how are companies and investors using the market today?

Let’s imagine you just started a coffee company and wanted to launch it on the market. The first thing you would do is present your company’s business plan to your potential investors. If they think your company is a good idea and deemed profitable to them, they would take the first crack at investing and then sponsor the company’s initial public offering, or IPO.

Now your company is officially available to the public. Any company or individuals could be a partial owner of your company by buying stocks. Their investment plays a big role in helping your company to grow, and as it becomes more successful, it would attract more buyers.  

Also, more demand for those stocks means higher their price, raising the cost for future buyers and heaving up the value of the company’s stocks people already own. This increase in demand reflects the prospects for your company, and it could help your fund new initiatives. It also boosts your company’s overall market value now that more people are willing to invest in your idea.  

However, if the investors think your company isn’t that financially rewarding or in other words, starts to seem less profitable, the opposite can happen. Now the investors would think that your stock value would decline, but before it gets any worse they would sell stocks they own with the hopes of making some profit.  As more stocks are sold, the demand for the stock would go down. The stock price would fall, and with it the company’s market value. This can saddle the investors with big losses – unless the company recuperates and starts to seem profitable.

Much like how the company’s market value is driven by supply and demand, the latter can be influenced by many factors such as price fluctuation of materials, labor costs and change in production technology. Other things investors may be wary of are bad publicity, and changes in laws and trade policies.

Also, plenty of stock holders simply sell their stocks for their personal interests, but stuff like this has the power to make companies appear more or less successful. And in the stock market, it may seem as though company is losing value, which eventually leads to losing investors and in turn, the actual value of the company.

Stock market is volatile, and this volatility is greatly influenced by human confidence in the market. No experts can really predict anything regarding stock market flawlessly. That being the case, most professionals discourage the idea of making quick cash and instead urge investors to go for reliable long term investments.

However, there are many tools that provide trading tips and profitable strategies available at your disposal. Also more tools to increase your chance of success are underway, and experts are constantly working on to reinforce the tools’ ability to predict the highly unpredictable system of the stock market.

Want to start investing in stocks? Well, with the dawn of the internet, you can do it the exact same way as a large investor would. But first, you would need to learn about this complex system. Then you can trade stocks, support the businesses you like, and pursue your financial goals.

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