What are the precise mechanics of how the stock market works?

Question

I think I get most of it, but how does the company I'm trading in benefit when I buy or sell shares? Surely I am buying and selling to other individuals and the company itself is irrelevant to the trade? Doesn't it just mean the company value is kept track of?

Answer 1

Companies go public to raise capital for expansion. The stock market provides ready access to this capital, bringing together the corporate principals and investors.

When there is no market, or when a market functions poorly, it will be harder for an investor to get a fair price when he sells. And that means that investors will "discount" the price of the stock when they buy. For example, if there is a poor market, there may be people out there willing to buy a share of a particular stock for $25, but since they have a hard time finding out about the stock, or finding a seller, the only people who actually buy the stock are people who are only willing to pay $20 for that same share. That hurts the seller.

And if you're looking to buy, and you know that it will be hard to find a seller when you want to take a profit, will you be as willing to buy at $25? Or will you wait until the selling price drops to $20, because you expect $5 worth of hassle later on when you go to sell?

And the company benefits by this because it's market cap accurately reflects its true value. That helps a lot when it wants to raise short term debt.