What is the Stock Exchange?

When a company is formed, and sometimes when it is expanding, it raises money by issuing shares which gives the buyer a stake in the company. In return for purchasing the shares the buyer receives part of the profits in the form of dividends. At a later date the buyer may wish to sell the shares. If the company has been doing well and paying out increasing dividends the buyer would receive more than was originally paid. On the other hand if the dividends were poor the buyer would expect to make a loss.

There is a problem in making known that a company is selling shares and in putting buyers and sellers in contact with each other. This is done through a Stock Exchange where dealers are involved in the buying and selling of shares and make a charge for this service. When a company is doing well the shares are in demand and the price to be paid rises. Demand by purchasers continues to rise since they believe they will make a profit by selling later. This tends to push up the price further than may be justified. When the company is doing badly holders of the shares want to sell and can only do so by accepting a lower price than that paid. As the price falls more holders of the shares want to sell before the price falls further. Some newspapers carry details of yesterday’s price so that people can decide whether to buy or sell.