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How the Stock Market Works

Many people don’t fully grasp how the stock market works and what its economic function actually is.  Behind all the complicated maths and (deliberate and unhelpful) mystique is a very simple economic function.  Entrepreneurs need capital to operate their businesses and individuals need outlets for savings.  Individuals can give entrepreneurs money in return for a SHARE of the company’s future profits or a STOCK of the company’s capital.  An individual can, at any time, sell this right to a share in the company’s future profits to another individual – this market, which can be organised or informal, is known as the share market or stock market.  Below is a great cartoon from the 1950s, unearthed by Graeme Acheson, which provides a helpful (if dated) explanation of how the stock market works.


   

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