Many of us have an interest in the stock market, but a lot of us haven’t a clue where to start when learning what’s involved. Where do shares come from and what benefits are there for a company in going public?
Luckily, the guys over at Kurzgesagt have created the following informative video – How The Stock Exchange Works (For Dummies). Check it out and view the transcript below!
What is the Stock Exchange and how does it work? The Stock Exchange is nothing more than a giant global network that organizes the market place where every day a total of over sixty trillion (60,000,000,000,000) Euros a year are traded.
This is More than the value of all goods and services of the entire world economy. However it’s not apples or second hand toothbrushes that are traded on this marketplace, but predominantly securities. Securities are rights to assets, mostly in the form of shares.
A share stands for a share in 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 terms of a pizza. The bigger the overall size of the pizza, the bigger every piece is.
If for example Facebook is able to greatly increase its profits with a new business model, the size of the companies pizza will also increase, and as a result so will the value of its shares.
This is of course great for the shareholders. A share which perhaps used to be worth 38 euros could now be worth a whole 50 euros. When it’s sold this represents a profit of twelve euro per share!
But what does Facebook gain from this? The company can raise funds by selling the shares and invest or expand its business. Facebook, for example, has earned sixteen billion dollars from its listing on the Stock Exchange.
The trading of shares though, is frequently a game of chance. No one can say which company will perform well and which will not. If a company has a good reputation, investors will back it. A company with a poor reputation or poor performance will have difficulty selling its shares.
Unlike a normal market in which 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 prices can rise or fall within 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 fast regardless of the real value of the company. Of course the opposite is also possible. If a particularly large number
of people buy weak shares, because if they see for example great potential behind an idea, their value 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. 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. And as the case with bubbles, at some point, they will burst.
The value of Germany’s biggest thirty companies is summarized in what is known as the DAX share index. The DAX shows how well or poorly these major companies and their economy as a whole are performing at the present time.
Stock Exchanges are in other countries and also have their own indices. And all of these markets together create a globally networked marketplace.