Let's face it, whether we are interested in the stock market or not, we are surrounded by elements of the stock market one way or another in our daily lives. When you wake up in the morning and you flip through the daily newspaper you will see the stock market there, when you are driving you will hear approximately an hourly report of the stock market, when you are watching the evening news at home, even coffee shops are plagued with conversations regarding the stock market.

It is obvious that the stock market is essential but do we know about the stock market as we claim we do? Questions such as; what is a stock market, where do we go to buy stock, how do we buy it and why do people buy and sell stock are some of the questions that may help you understand more about the stock market.

If you decide to open a saloon, you rent a space for your business; you go out and buy the equipments you would require for the saloon such as mirrors, chairs and tables and you also hire the staff to assist you in the saloon. Finally, you open the doors for your business to begin. In this hypothetical situation, let's imagine that you have spent RM450, 000 on the area for your business and all the other items to get you started on your business. And in the first year of doing business you have spent RM200, 000 for the staff's salary and supplies. At the end of your first business year you have calculated the money you have received and have determined that your total income is RM350, 000. So all in all, your net profit is RM150, 000 after the deduction of the income (RM350, 000) from the expense (RM200, 000).

When it comes to the second year you decide to bring in RM300, 000 and the expenses for that entire business year remains the same. And your net profit is RM100, 000; however you decide to sell the saloon at this point. But how do you determine the worth of your business?

You could say that your business is worth the RM450, 000 that you have put in, from the business premise, the equipment and basically just about everything else that is associated with the business. This however is a mere simplification of the situation, in reality the premises value might have increased or even decreased, the equipment's value has definitely went down as it has already been used. But again to simplify the calculations, let's presume that the value of your business has balanced out to the amount you have put in, which is RM450, 000. This is known as book value or asset value of your business – which basically means the value of all the business's assets if it was sold. This is called value determination.

Now let's take it a step further. If you had kept your business and instead of selling it you expand it, you would have made at least another RM100, 000 the coming year. So you can think of your business as an investment that will pay out RM100, 000 in interest every year. If you are able to take advantage of this, investors might be willing to pay you RM1, 000, 000 for the saloon, with a RM100, 000 interests per year on the RM1, 000, 000 investments which is a 10 percent return rate. If the investors think that the saloon might have a chance in earning more and the increase in this is faster than that of the inflation rate, they might consider in investing more into the business.

Your business might cost RM1, 000, 000 but not everyone can afford to buy it, so what you can do is set the price by dividing the business into 10 equal pieces for people to purchase. This is known as selling shares of your business, where they get one-tenth of the profits of the business at the end of the year and can decide on the direction of the business by getting an opportunity to vote. There a variety of ways you could sell the shares of the saloon. You can decrease it until the general public can purchase the shares or you could even just sell some of the shares so that you still own the majority of the shares and remain in control of the saloon.

Basically the stock is as simple as that hypothetical situation. The company's profits and assets are represented by its ownership. The share's portion of the company's profits is represented by the dividend of the share of the stock, which is usually dispersed annually. Again coming back to the saloon, if there are 10 owners, with each of them owning one share of the stock, the owners will get a dividend of RM10, 000, if the saloon makes a profit of RM100, 000 for that year. And this applies to larger companies as well, such as Apple, where the shares can go up to millions. When this happens the same rule still applies where the company's total profits are divided by the total amount of shares that have been bought and are sent out to the shareholders as dividends.

The capitalization of the company is the product of the number of outstanding shares multiplied by the share price. This is where investors are able to measure the value of the company, so that they can make estimations and evaluations before investing in that particular company.

Let's say that the saloon was owned by a private citizen, and the stocks are also sold to other private citizens in the community. It is more convenient to do so, especially through word of mouth or by placing ads in the local newspaper. However, when the shareholders want to sell their stock, this can become a problem for them because they need to go out to search for a buyer and convince them about the business that they will invest in. This is where the stock market comes in, stock market is literally like a market where you can go in search for the stock that you can afford and suits you financially. Instead of going to different places to do your shopping, the stock market holds everything in one roof for you to buy and sell your stock. The stock exchange is where publicly traded companies are sold and bought.

These stock markets are very convenience for people who want to buy and sell stocks. Get a hold of a stock broker and they will buy and sell your stock on your behalf, so you don't have to travel great distances to the stock exchange and the brokers can help you monitor your stocks, this would be essential services especially for the working adults. And not to mention you can do the transaction instantaneously, without worrying that the share's price would decrease while waiting to sell it.

Since all the buying and selling is focused in one place, prices of the stock can be known every second of the day. Once the prices of the stocks start to fluctuate due to economic factors, investors take these into accounts on whether to sell or to buy. Or it can also reflect the projected earnings of the company, the dividend that the stock pays and so on.

Corporations

Corporations are where any businesses can turn into, in order for them to sell their stocks to a number of different people. Incorporating is the process where businesses are turned into corporations.

A sole proprietorship is when you start your own business with your own money and buying all the essentials to start your own business. Since you are basically the owner of the business premise, you call all the shots for the business plus you get to keep the profits for yourself. However, if the restaurant was started as a team, then that is what you call a partnership, where they make the decisions together and the profits are shared amongst themselves.

The concept is a little different for a corporation. They are known as a virtual person because a corporation can own property; it can sue other corporations or people, make contracts with them. Owners of the corporation also have shares in the corporation to represent their ownership and they also have stocks which can be bought or sold.

There are even laws that exist to monitor the operations of these corporations, with the majority of them put into place to protect the public, shareholders and these laws encompass how a corporation is organized and operates. The board of directors is essentially the brain of the virtual person and every corporation has a board of directors. The boards of directors also make decisions for the company such as hiring the president and other major officers in the company as well as setting the companies policies. In an event that the shares of the corporations are owned by one person, then that person can decide whether there will be one person on the board of directors. No matter how many people are on the board of directors, there is still going to be a board.

Shareholders

As such the shareholders can be defined as a group of owners of that particular corporation; this is where the owners elect a board of directors to basically run the entire operations of that corporation. People can become owners of by purchasing stocks of the corporation. The board of directors will determine the amount of stocks that will be sold; an example would be that a particular company might have 2 million shares of stock. There are two types of stocks, where a company can either be publicly held or privately held. For privately held company, the shares are owned by a small group of people that sometimes know one another. So they can sell and buy shares between themselves. Whereas, for a publicly held company, the shares are bought and sold by thousands of people who trade on a stock market.

A major reason for corporations to exist is to create a system for them to collect lots of money for them to get investment money to start a business. For example, you would want to start an express bus company. You will need not only a whole fleet of buses but staff as well, not to mention maintenance of the buses and so on. So for you to get started, you can form a corporation to sell stock so that you can gain money to jump start your business.

So in essence a corporation is an easy way to quickly and efficiently gather large quantities of investment capitol from investors. When they initially first sell stock to the public it is known as Initial Public Offering (IPO), for example they can sell three million shares of stock at RM10 a share and make RM30 million very quickly. With that amount they will use the money to invest in the company and the investors will hope that their investment will yield results in the form of dividends.

Corporations also exist to limit the liability of the owners to some extent, for example if the corporation gets sued, then the corporation has to pay the settlement. The worst that can happen for a corporation is going out of business. However, if you are the sole proprietor of a particular company and the company gets sued, then it is you as the owner who gets sued. So if you lose the law suit, you may lose everything you own as well.

Stock Prices

Let's look back at the hypothetical situation that was mentioned earlier on, after the new corporation has been created and uses the IPO to raise RM30 million in investment money by selling three million shares at RM1O per share. Then the corporations uses the money to further develop the company and in the first year of its operation the company has made a profit of RM2 million. With that money the board of directors can decided on how to use it such as using the money to further expand by hiring more staff and equipment, they can also decide to give all the profits to the shareholders, the board can decide to save it in the bank as well or they can and choose a combination of the three options.

Income stock is where the company usually will pay out most of its profits to the shareholders, where they can get income from the company's profits. Whereas for growth stock the company puts the money back into the business so that they can expand the company. This can be done through the purchasing of more equipment and also the hiring of more staff.

Stock Prices: Income vs. Growth

Income stock is where from year to year the price of the stock tends to remain the same unless the profits of the corporation go up. The income stock will remain fairly flat while people are getting their money every year but business is not growing.

However if the company were to save its profits for several years and eventually decide to open a second restaurant, this would be known as a growth company. This is where the value of the stock rises due to twice amount of equipment that needs to be purchased, which also means that the company also earns twice as much. The value of the company is increasing through such a method, though shareholders do not get a yearly dividend as opposed to the shareholders of the income stock. However, if they decide to sell their share, they can get more money in return. So people would pay a higher price for the stock if they saw the increase in book value such as the value of the equipment and building as well as the increase in profits that the company is earning.

The Securities Commission is in charge of collecting the information of the publicly traded companies for the investors. As all the financial information about the company is public knowledge. Indicators such as the price/earnings ratio are used to determine how much the stock is worth. The price of the stock is divided by the earnings per share and there are numerous other indicators that can be used. Not to mention the wealth of other financial information that is available on any stock. The internet also contain such information for the convenience of the shareholders who wish to buy or sell their stock online or even for people who want to do further research before buying or selling a share.