Stock Markets Exposed

Stock market, how & why they invent it? the point of stockmarket is solely secondary market, right?

keyword: secondary market, share value changes, traditional investing, stockmarket=secondary market Why there's secondary market where the stock value could change to represent company progression? In traditional way, when you invest to my business directly, you got your share of profit, your share value become bigger or lower depending on company progression (In case of separation of partners). My point is, How and why they invent the stock market, where money goes wild in secondary market? Why not just own shares in company, have profit once a year (depends on how many shares do you have), that just it: the share value don't change, only matter: quantity? 10 pts. for good or detailed answer In respond to MICHO: I don't think the stocks value doesn't really reflect the company value. Why not just calculate the the company value, thus this automatically change the stock value every morning? Why the stock value determine by investors, thus reflect the supply and demand? thx! anyone could answer Correction: It doesn't really reflect company value

Public Comments

1. stock markets for exchanges stockes and determine the price of stocks without it u cant manage a huge busniess full of stockholders
2. There are 2 kind of companies -- private and public. If your company is private you should not worry about any wild stock volatility since there is no such Public company has lots and lots of small owners and that company shares continuously change hands, thus potential problem of volatility.
3. A sole proprietory business and also a partnership firm suffered from two major drawbacks; one, none could mobilise large resources if some big project was tobe undertaken and financed. Two, the liability of members was unlimited and in the event of failure of business, the private properties and personal assets of proprietors/partners could also be attached and used to pay off the creditors. The joint stock company was evolved to address to these two issues and also a few others. The capital of such a company is divided into shares of small face values and opened up for subscription by all kinds of investors who could affort even small sums. For example, a company formed with a capital of, say, $ one billion could have one billion shares of $ 1 each and an investor could acquire just 100 shares by putting $ 100. This small investment makes the investor one of the owners of the giant sixed company and get benefits like dividends on the investment etc. Now, if the investor finds the company to be not doing as per his/her expectations, what could be done? Unlike in thecase of a partnership firm or a sole proprietory business, it is possible to quit the company without dissolving or closing it down. And the stock exchanges provide a forum for so doing. You can sell your shares on a stock exchange (as per rules and regulations) and get out of the coompany, Now, this would not be possible unless there is someone always available to buy your shares. And to make it possible, continuous trading is done and volumes of trading are far more than the shares which a company had issued. The same will hold good if an investor wants to buy shares of a company. A very important point is the return on the shares which an investor holds in a company. Dividends declared by firms are not enough. For example, our example investor who had bought shares of $ 1 each finds that the company had declared a dividend of 25 c per share. He will get 25% return. However, he may buy the share from the market at a price of, say, $5 in which case a 25 c per share dividend would work out to a meager return of just 5%. Extending this example, our investor may find a lucrative opportunity to earn good return on this share. How? He/she may get the dividend and his income would be $25. After this, he/she may sell away his 100 shares which were purchased at $ 1 per share at $5 per share and get a capital gain of $ 400. His total gain would thus be: $400+$25 = $425 on an initial investment of $ 100. i.e., a huge return of net 325% on investment or a gross of 425% on such investment. If share values stand constant, investment in companies would become a lack lustre affair and noone would come forward to make it. In fact, there would be bad times also for the company and during these periods the returns would obviously be thin. Because of this, investment in a company is fraught with risk and a profile of high-low returns enables an investor to remain incentivised and thus invested in the firm. Share values change in response to variations in the returns earned by investors in the investment. There are many other considerations also which affect share prices on the stock markets.
4. Actually stock values do just that.... they DO reflect company value! Yes the stock market offers a "secondary" market but this is a GOOD thing. Initially when a company IPOs investors buy shares of a company. Without a secondary market those investors would be LOCKED IN on their positions making share ownership very iliquid. A secondary market creates liquidity for the share holders (ability to easily sell your share). And also provides the best valuation mechanism for a company. Future share offering by the company will be based on the valuation of previous offerings. This liquidity also makes the shares MORE valuable. If you were to purchase shares of a company and had no means of selling them after your purchase that increases your RISK and therefore would be priced into the shares in the form of a lower share price. While it is not perfect and prone to over and under-valuations supply and demand is the most accurate means of valuation. You suggested valuing a company each morning .... Who is to do this? There are many different valuation techniques and each one has different "assumptions" who is to determine whose assomptions should be used? That's why supply and demand does the best job, everyones different assumptions get factored in and supply and demand gravitates towards the valuation that that market feels is the best at the time given the available information.
5. In addition to Braj K's answer, its important to remember that the share price of a company is not based solely on the company's profits and assets, but more so on the desire of investors to be a part of that company. Any good or service is worth only as much as some one else is willing to pay you for it. Regardless of whether you have a partnership in a private company or shares in a publicly traded company, if you were to sell that interest you will always sell it to the highest bidder. If a company was worth say $1,000,000, and you owned 5,000 shares out of a total 10,000 shares, as I understand it, you believe that the value of each share should be fixed at $100 ($1,000,000 / 10,000 shares). This would give you a total share value of $500,000. Now, lets say that another investor believes that next year this company is going to have a bumper year. The new investor believes that the company will be worth $1,500,000 this time next year. Using your theory, the share price at this time next year will be $150 ($1,500,000 / 10,000 shares). This new investor believes that he stands to make a small fortune and wishes to purchase your 5,000 shares from you. If the new investor offers to purchase your shares from you for the current market price of $100, you probably wouldn't sell your shares since there is no incentive to do so. Since the new investor believes the share price is going to go up to $150, he/she is willing to pay you a higher price of say $110. This means that the new investor is willing to pay you $550,000 for your shares that are currently worth $500,000, giving you plenty of incentive to sell. Essentially, this forces the share price up since the new investor has purchased shares at $110 rather than $100. The company is now worth $1,100,000 ($110 x 10,000 shares) however the actual profits/assets of the company have not changed. In the reverse instance, you believe that the company will have a terrible year next year and will be worth $500,000 at this time next year. This means that the share price at this time next year would be $50 ($500,000 / 10,000 shares). Obviously, you would be concerned about losing half the value of your investment and you want to sell your shares. As it stands, other investors are also concerned about the company's performance over the coming year and will not pay you the current $100 share price since they are worried they will lose their own money. In order to sell your shares, you must sell them at a reduced price in order to attract buyers. Let's say you find another investor willing to purchase your shares from you for $90. You still lose a portion of your investment, but the loss is much less than had you held onto the shares over the coming year. Since you sold your shares at $90, this becomes the current value of each share. The company is now worth $900,000 ($90 x 10,000), however, once again theprofits/assets of the company have not changed. If you were to own a partnership in a private company, the same theories would apply, however, they would be much harder to accomodate. Potential investors would be much more difficult to find, the costs of transferring ownership would be high, and the time spent in negotiation and drawing up legal contracts etc would be lengthy. The share market (or secondary market) is a platform designed to overcome the logistical barriers of selling/buying partnerships in private companies. It makes owning a portion of a company easier by providing an open forum for sellers and buyers to locate each other and negotiate prices quickly. This creates high liquidity ownership at a much lower cost, making it viable for the ordinary investor. The market does not simply "go wild" in the secondary market. The ease of buying and selling means that transactions occur so quickly that prices can fluctuate, but this is only a result of the increased accessibility. Usually, share prices tend to fluctuate in line with general market sentiment towards the value of a company, thus valuing that company based on the general perception of its worth accross the entire market. If share prices were to be determined daily, they could only be based on profit/asset information as investor sentiment cannot be accuratley measured (except by supply and demand). Another barrier to this idea is that companies do not release profit information daily. How would an accurate determination of company value be made daily without daily information? Thirdly, this all costs money, what sort of premium (in addition to already existing fees/costs) would you be willing to pay to fund the administration of this system? Finally, I personally believe, that if the value of a company was fixed daily, there would be limited incentive for transactions to take place. Who wants to get current market value for their investment? - Shares are not about the dividends recieved from profits each year, but the capital gain which can be made when buying low and selling high! Take away the capital gain opportunity, and the market falls apart. Cheers Richard