(Continued from part 1)

When corporations have financial needs to expand their business without resorting to borrowings, they have an option of listing in a stock exchange. This means that they sell shares representing ownership of their company to the public in exchange for cash. The funds generated will then be used for business expansion. This process is known as an Initial Public Offering (IPO) of a company. During IPO proceedings, shares are sold to investors (individuals and institutions) through an investment banker who manages the liquidation of these corporate shares. This is what we call a primary market. Subscription periods are usually allotted by investment bankers for investors to participate prior to having the share prices dictated by market forces of an exchange. After the (IPO), the shares can now be traded publicly through the stock market as an exit mechanism for investors in the primary markets as well as for other participants left out during the subscription period. This is what we call the secondary markets. (stock exchanges). In the secondary markets, company shares can be easily bought or sold through trading in the stock exchange.

The stock exchange is the entity that expedites the Initial Public Offering (primary market) as well as monitors the trading of the company's shares in the exchange (secondary market). It also acts as the regulating body of the stock market. The shares of a company listed in the stock exchange will constantly be traded as long as buyers and sellers continue to exchange. It is only when the company files for solvency that shares could possibly be de-listed and if left unresolved. It is the regulating body's responsibility to ensure transparency of the business activities engaged by listed companies.

When one purchases shares of a company in the stock market, one is considered part owner of the company and is entitled to dividends (if its a dividend stock) and even voting rights. That means that it has an intrinsic value of having claims of ownership over the corporation's assets. For instance, in cases of unresolved bankruptcy where a corporation is to dissolve, shareholders would have claims to assets after taxes and creditors are paid. Purchasing corporate shares or stocks has been a popular investment vehicle for those who find value in believing that the company has a bright future as far as profitability and expansion are concerned.

Investing is what happens when shares are purchased and kept for the long haul. (buy and hold) One should have faith in the company and as an investor, believes that the products and services that it offers can perform well and generate consistent earnings in the future.

On the other hand, short-term trading suites those, who profit from the movement of prices (volatility) over a shorter time frame. These are usually people who want to stay liquid at most times. They focus on generating faster returns. The weight of investment decision lies more on the stock price of the company rather than its corporate performance.

This clearly shows that the stock market offers an arena for both types of investors- long-term or short-term investor. Which of the two will you rather be? :)

Next week we will focus on the tools we can use as basis of our trades or investments.

To be continued..