Understanding the Importance of Stocks

The stock market can be intimidating, but a little information can help ease your fears. Let's start with some basic definitions. A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you're entitled to a small fraction of the assets and earnings of that company. Assets include everything the company owns (buildings, equipment, trademarks), and earnings are all of the money the company brings in from selling its products and services.

Why would a company want to share its assets and earnings with the general public? Because it needs the money, of course. Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money (a process known as debt financing) or sell stock (also known as equity financing).

The disadvantage of borrowing money is that the company has to pay back the loan with interest. By selling stock, however, the company gets money with fewer strings attached. There is no interest to pay and no requirement to even pay the money back at all. Even better, equity financing distributes the risk of doing business among a large pool of investors (stockholders). If the company fails, the founders don't lose all of their money; they lose several thousand smaller chunks of other people's money.

Perhaps the best way to explain how stocks and the stock market work is to use an example. For the remainder of this article, we'll use a hypothetical pizza business to help explain the basic principles behind issuing and buying stock. We'll start on the next page with the reasons why a restaurant owner would issue stock to the public.

Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The National Stock exchange (NSE) is an example of such a market. Modern stock exchanges make buying and selling easy. You don't have to actually travel to New York to visit the New York Stock Exchange. You can call a stock broker who does business with the NYSE, or you can buy and sell stocks online for a small fee.

There are two big stock exchanges in the United States:

• NSE – National Stock exchange
• BSE – Bombay Stock exchange

Shareholders are the people who own shares of stock in a company. Collectively, the shareholders are the owners of the company, since each share of stock entitles the owner to a say in how the corporation is run. Shareholders elect a board of directors to make the company's major decisions, such as the number of shares to be issued to the public.

Interestingly, not all corporations decide to have public shareholders. Corporations can choose to be privately or publicly held. In a privately held company, the shares of stock are all owned by a small group of people who know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.

About DreamGains

Dreamgains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.