How The Stock Exchange Works (For Dummies)
What is the Stock Exchange and how does it work?
The Stock Exchange is nothing more than a giant globally network tend to organize the market place where every day huge sums of money are moved back and forth. In total over sixty trillion (60,000,000,000,000) Euros a year are traded. 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. If you think 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 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 with perhaps use to be 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 it’s business. Facebook for example has earned sixteen billion dollars from it’s listing on the Stock Exchange. The trading of shares though, is frequently a game of chance. No one can say which company is going to perform well and what 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 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 have therefor 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 particular large amount 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 sales.
In the best case scenario this will result in their idea becoming reality. In the worst case scenario. this will result in a speculative bubble with nothing more than hot air. And in a 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 poor each of this major companies and there by the economy as a whole are performing at the present time. Stock Exchange is in other countries that also have there own intecies. And all of this markets together create a globally networked marketplace.