Pros & Cons of the Stock Exchange
Stock exchanges have been around for hundreds of years (the Antwerp Bourse began in 1460, while the New York Stock Exchange was founded in 1792) as marketplaces where businesses and investors trade titles of ownership, called shares, in a company. Millions of people and businesses have used stock exchanges to their advantage, both to raise money for further investment and for personal enrichment. However, stock exchanges are notoriously volatile, and many investors have lost their savings.
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Stock
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Stock is the initial capital that a company has. When a company goes public (meaning ownership moves from a closed and private group of individuals to whoever wishes to buy a share), it splits this capital into units called shares and auctions the shares off. Share prices are, at the most basic level, determined by a company's expected long-term profits.
Pro: Raising Capital
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Selling stock allows companies to raise capital. When companies sell stock, they use the proceeds to expand their operations, by buying new buildings or machinery, updating existing infrastructure, investing in employee development or any number of possible capacity-building initiatives. The purpose of capacity-building is to make a business bigger and better.
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Pro: Investing
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Investing in the stock exchange can also be a lucrative strategy for investors. Turning a profit involves many factors, primarily thorough research into a company, investing in sound and innovative businesses and a fair amount of luck. By investing in growing companies through stock, individuals and firms can provide the necessary funds to develop a business while making a profit.
Con: Speculation
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Stock prices can be driven artificially high by speculation about a national economy or any particular industry. At some point, investors realize that stocks are artificially inflated and prices collapse as stockholders frantically try to sell off inflated stock before the market hits rock bottom. Sell-offs create a self-perpetuating cycle, where most people sell and few to none buy, leading prices to plummet and often destroying companies and investor savings.
Con: Exogenous Shocks
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The stock market is notoriously volatile, and investors and businesses can find themselves in financial straits due to minimal or no fault of their own. The stock market is sensitive to rumors and exogenous shocks, and investors and businesses often lose considerable amounts of money due to market reactions to government decisions, currency fluctuations and changes in the price of raw materials.
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References
- Photo Credit new york stock exchange image by Gary from Fotolia.com
