The base that guides the stock market
Imagine you have a bakery. My baker's secret recipe is used by my late grandmother. The deal is slow at first, but customers love cakes and muffins and start expanding their operations. Orders have been made very soon and can not keep up with demand. You decide to open a second bakery. He opened a third bakery for a long time and so on.
Even with increasing revenue, it's likely that you don't have enough money to start your next bakery. There's a lot of money to open up new places. A new bakery does not have an existing customer base and it is questionable whether a new place is profitable or not. Some companies have decided to get a loan from a traditional institution like a bank. Others decide to increase their investment capital. They go to the stock market and earn money.
Consulting a well-known Wall Street company investment banker. During the consultation, the investment banker examines your business activities and decisions with great business benefits (great grandmother recipe). An investment banker believes that you can make even more money if you start expanding. He says he makes some phone calls, organizes meetings with some investors, and comes back to you.
It takes a couple of weeks, but the investment banker will finally come back to you. You think it's a great candidate for the public. He created the legal paperwork, and if you are interested in making progress, you have to go down to his office and examine them. When you sign the paperwork, the bakery starts trading on the stock market. The initial market limit (goodwill) will be $ 50 million. Owned by some shares. Some of the shares were set up by the investment banker. The reminder will be offered to the public in a public offer. The value of the company after the IPO is determined by the stock market. The millions purchased by the IPO target the future expansion of the company.
One year passed and the bakery business was very good. The share price has more than doubled, but how and why?
The stock market can be considered an auction market. Both the buyer and the seller come together at a price that all of them consider fair. The price of the shares depends on a number of factors: the projected increase in earnings, the results of the management, the total corporate income, the economic outlook of the industry, the book value of the company (the value of the company's assets) is currently worth it and so on. Stocks grow when these factors are positive. The value of stocks decreases if these factors are negative.
Warren Buffet once said, "If a business works well, the stock event will happen." This is the unique truth about the stock market. Everything else that is equal, well-run companies run the stock market. Businesses that are poor are seeing a drop in stock prices. This is the basis of the stock market.