The stock market in October is down. The Dow is down about 1,280 points or 4.6%. The decline is scary, but in the long run it is ultimately meaningless. Stick to plan and the market will eventually recover. The topic of this newsletter will be informational. We talk on multiple occasions about the stock market. However, we don’t talk as much about what the stock market is. We are going to talk about the purpose of the stock market and little about how it works.
The purpose of the stock market is to raise money. At some point in the corporate lifecycle, many companies need to raise money for the purpose of expansion. There are many ways to raise money; one of those ways is the stock market. The company sells some of itself to the public which is plain English for sells equity in the public equity markets. The original owner(s) exchanging some of their equity for money is not a decision taken lightly as becoming a publicly held company is a highly regulated activity with a lot of expensive reporting requirements. Usually a company (if possible) will raise money with debt or private investors. Obtaining public investors is usually required however (with some exceptions) if the company wants to become very large, as the stock market is a very effective form of fundraising.
Every aspect of Wall Street revolves around the process of raising money for companies. The industry is split into the sell side and the buy side. The sell side would include the people who package the equity into something that can be sold, rating agencies that evaluate those packages and assign them a rating, the people who sell that equity to people on the buy side, etc. The buy side would be the various corporate entities that purchase that equity offered for sale. They will purchase on the primary market. They will either hold that equity or sell it on the secondary market. The secondary market is the sandbox that you and I get to play in. It is where retail investors can purchase that equity. After that equity is bought it can either be held or sold within the secondary market. Every link in that chain has be strong and functional in order for the stock market to optimally accomplish its fundraising responsibilities.
If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Thank-You,
Daniel and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading my free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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