I've been wanting to write a simple step-by-step guide on how the stock market works. While searching for materials to better explain it I stumbled on this comprehensive cartoon video describing every step of the process. I share this video with you and provided a brief outline:
- A company needs to raise more funds for various reasons (expansion, to pay off debt, to finance new projects, etc.)
- The company gets a permit to sell its shares (proof of ownership of the company)
- The Company seeks the help of an investment banker and presents essential documents to be used in registration
- The investment banker provides information on the company to Securities and Exchange Commission and attests the accuracy of the information provided.
- SEC approves the registration as a listed company
- The investment banker pays the company in exchange for a certain number of shares.
- The investment banker sells the shares through the stocks market (or the Philippine stocks exchange locally)
- The most common way for the public to profit from investing is through price appreciation and dividends (return on a portion of income)
- A good earnings performance by the company will naturally help the price to increase and will allow it to declare dividends, thus attracting more investors.
- The value of the stocks may go up or down because of different perceptions of the investing public (An investor may deem a stock price to be cheap at P100, but another may think that's too expensive)
Should the company need additional funds it can again go through the same cycle by issuing additional shares, subject to approval and complying with necessary requirements. Next week we'll discuss the important roles of each institutions involved so make sure to visit us again!
Happy investing!
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