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How does the stock market work in simple terms

We’ve all heard of the stock market, and through films like Wallstreet we’re probably aware of some of the inner workings of the process, but how does the stock market work in general?
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Why do we need the stock market?

The best way to understand why the stock market is needed is to take a look at an example. If an entrepreneur wants to start a new business, there are massive start-up costs to meet. A businessman who’s planning on building and selling cars, will need land, a factory, materials and workers. When you consider sales, marketing and administration requirements, you’re looking at needing a heap of cash. Getting investors for this start-up venture would be difficult, but dividing the company into stocks and selling the shares could give the business the capital it needs to get going.

Share prices

This is where knowledge and experience really comes into play. You’re basically gambling on the future of a firm when you buy shares, so think of it like putting money down on a horse. Your money is used to make the firm profitable and you get your money back plus a dividend. Of course, as the shares increase in value you’ll have the option of selling them on for a profit. Different firms have different share prices and these fluctuate with performance and with market perception of the firm’s strength. Backing a winning firm is like backing a winning horse but with the added advantage that your money has been used to improve the company.

Investors

Pension funds invest in the stock market and businesses do as well, but individuals can also be part of it. If you’ve got some cash that you’d like to invest, you should take independent financial advice before sinking your hard earned cash in. You should also consider using a stockbroker service.

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