The stock market is what sets the value of a company. It is what you hear people talking about when they say that a certain company or product has a lot of "good investment potential." This means that there are many different types of traders involved in the market and that it fluctuates often because these traders have no idea what they're doing half the time.
The stock market itself functions as an intermediary stage between buyers and sellers . In order to buy products from a business, one would need money. In order to get money, one needs another job or to sell something so that he can have enough money to feed himself for the rest of his life. However, what if someone doesn't want to do this? He could just sell what he has, and then use the money he gets from that to buy things. The stock market is what mediates and regulates all of this economic interaction between people (businesses and possible future employees), because it allows for ideas like stocks and bonds .
Now what are these "stocks" and what do they do? To put it simply, a company issues a certain number of stocks in order to get money. For example, if there were only 10 stocks out there (meaning that each one gives you 1% control over the company) and only 5 people bought them, then those 5 people have what's called a majority stake . This means that they have what's called a controlling interest , or enough power to determine how the company is run. (See also the best risk management books for options trading.)
This can be dangerous if one of the owners wants to get what's called an "exit strategy" , which means that they are planning on selling their stocks back to the company for a certain price, thus receiving what's called "dilution" (because everyone else owns more percentages of the company than them).
For example, let's say that someone bought 1 stock in Google when it first started, and now let's say it was worth $500,000. If he could sell his single share for half a million dollars (which would normally never happen), then when he went to spend his money, there would be an inverse multiplier effect throughout the economy. What this basically means is that since none of the other shareholders could possibly get what's called an "exit strategy" because 1/10 of Google is worth half a million dollars, then the value of 1 share would go up to $5 million (thus making it so that the original owner couldn't cash in his shares).
This scenario can be avoided if certain regulations are put into place.
But essentially the stock market is a way for companies to raise capital. A company may want to be able to buy new equipment, hire more employees, or even go on an advertising spree in order to increase the value of what they produce. To do this, they issue what are called stocks and what are called bonds .
A stock represents a sort of claim over what the company does. And if you own enough of it, you can control the company itself.
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