The stock exchange explained

What is the Stock exchange?

The Stock exchange is nothing more than a giant market place where everyday large sums of money are traded.

According to wikipedia As of 2015, there are a total of 60 stock exchanges in the world with a total market capitalization of $69 trillion. This means that $69 trillions are traded per year which is more than the value of all goods and services of the entire world economy.

Securities are traded in this market place. Securities are rights to assets, mostly in the form of shares. A share stands for a piece of a company.

But why are shares traded at all? Well, first and foremost the value of a share relates to the company behind it.

Think of the value of a company in the form of a pizza, the bigger the overall size of the pizza , the bigger each piece is.

If for example Facebook is able to greatly increase its profits with a new business model.

The size of the company’s pizza will also increase and as a result so will the value of its shares. This is also great news for the shareholders. For example a share which used to be worth 38 dollars could now be worth a whole 50 dollars. When it is sold this represents a profit of 12 dollars per share.

But what does Facebook gains from this?

The company can raise funds by selling the shares and invest or expand its business.

Facebook for example has earned 16 billion dollars from its listings on the stock exchange.

The trading of shares is more or less a game of chance. Nobody can predict which company will perform well or not.

If a company has a good reputation investors will back it up whereas one with a poor reputation will have a hard time selling its shares.

Unlike a normal market where goods can be touched and taken home, on the stock exchange only virtual goods are available.

They appear in the form of share prices and tables on monitors.

Such share price may rise and fall withing seconds.

Shareholders therefore have to act quickly in order not to miss an opportunity.

Even a simple rumor can result in the demand for a share falling regardless of the real value of the company. Of course the opposite is also possible.

If a large number of people start  buying  weak shares because they see for example great potential behind an idea. The value of the company will rise as a result. In particular young companies can benefit from this. Even though their sales might be falling, they can generate cash by placing their shares on the stock market. In the best case scenario this will result in their idea being turned into reality. In the worst case scenario , this will result in a speculative bubble with nothing more than hot air.An as in the case with bubbles, at some point , they will burst.

The Stock market in all countries have their own indices.

All the markets when put together create a globally networked marketplace.

Thank you for reading.