The Stock Market

Why does the Stock Market Exist?

       Business is the cornerstone of any economy.  Almost every large corporation started out as a small, mom-and-pop operation and through growth, became financial giants.  Wal-Mart, Dell Computer, and McDonald’s had combined profits of $10.34 billion this year.  Wal-Mart was originally a single-store business in Arkansas.  Dell computer began with Michael Dell selling computers out of his college dorm room.  McDonald’s was once a small restaurant no one had heard of.  How did these small companies grow from tiny, hometown enterprises to three of the largest businesses in the American economy?  They raised capital by selling stock in themselves.

       When a company is growing, the biggest hurdle is often raising enough money to expand.  Owners generally have two options to overcome this.  They can either borrow the money from a bank or venture capitalist, or sell part of the business to investors and use the money to fund growth.  Taking out a loan is common, and very useful – to a point.  Banks will not always lend money to companies, and over-eager managers may try to borrow too much initially, wrecking the balance sheet.  Factors such as these often provoke owners of small businesses to issue stock.  In exchange for giving up a tiny fraction of control, they are given cash to expand the business.  In addition to money that doesn’t have to be paid back, “going public” [as its called when a company sells stock in itself for the first time], gives the business managers and owners a new tool: instead of paying cash for an acquisition, they can use their own stock.

What is the stock market? 

        When people choose stocks, they usually want to buy the popular brand names.  However, if they look for companies such as Pizza Hut, Oreo cookies, or Kleenex, they won’t be able to find them.  These products are not listed in the newspaper because they are not their own company and are, instead, part of a larger company, also known as the parent company.  For example, Tricon Restaurants International owns Pizza Hut, Nabisco owns Oreo cookies, and Kimberly-Clark Corporation owns Kleenex. 

Products and Parent Companies:

Stock Symbols:

NASDAQ

NYSE

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