So why do they do It?
Market forces aren’t a total mystery, though. We know, for example, that prices rise and fall primarily because of changes in supply and demand. The same is true for stocks. In a free market system, the price of any commodity will rise as demand for it increases, as long as there’s a fixed amount of the commodity in circulation. If there are a fixed number of shares in circulation, then the price of the stock will rise as more people want to buy it, and fall as more people want to sell it.
Let’s say that you’ve always dreamed of opening a pizzeria. The building and equipment would cost $500,000 up front, and annual expenses (ingredients, employee salaries, utilities) would cost an additional $250,000. With annual earnings of $325,000, you expect to make a $75,000 profit each year. You love pizza, and you’ve done your homework to figure out how much it would cost to launch a new pizza business and how much money you could expect to earn each year in profit.
They would each have to go out and find a new buyer, which might prove difficult, especially if the company isn’t performing very well. Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange (NYSE) is an example of such a market. In your neighborhood, you have a “supermarket” that sells food. A stock market solves this problem.
If the corporation gets sued, it’s the corporation that pays the settlement. Let’s talk more about the relationship between shareholders and corporations in the next section. If you’re a sole proprietor who owns a restaurant, and the restaurant gets sued, you’re the one being sued. The corporation may go out of business, but that’s the worst that can happen. Shareholders are the people who own shares of stock in a company. If you lose the suit, then you can lose everything you own in the process.
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