Important Financial Decisions

As the name implies, a stock market is simply a market that deals in stocks and shares. The most important component of a stock market is usually a stock exchange, which provides a formalised means of trading in stocks and shares as well as other securities. Shares can be traded 'off exchange' or 'over the counter' but a stock exchange provides a proper structure and is often part of a global market for securities.

Businesses may start as self-employed operations then become private limited companies for tax and other reasons, often with a husband and wife holding the shares. As the company grows and takes on employees, the arrangement may remain the same. Required financing may be obtained through bank loans and overdraft arrangements.

The company may eventually reach a size where the private limited company set-up is no longer appropriate. It may be expanding faster and need money for acquisitions. There may also come a time when the company owners decide to profit from their investment. This may be achieved through selling the company, which will require finding a willing buyer and probably relinquishing control of the business, or selling shares in the firm.

The latter course of action means the owners need sell only part of the company and can retain control. A number of shares will be created in the company, with a value placed on each one, and some of the shares will be offered for sale. This can be done privately but the more common way is to launch the company on a stock market.

Once the company is launched in this way, the shares will find their own level. They are worth what people are prepared to pay for them and their value will be dependent on several factors - the assets within the company, its profitability and trading prospects among them.

The danger of trading a business on a stock market is that control can be lost. Another company may buy shares in it and, once it reaches a certain level, is obliged under stock market rules to put in a formal bid for the remaining shares. Although this can be resisted to a degree, the wishes of other shareholders may prevail and a change of ownership will result.