How does a Stock Exchange Work?

A company is a 'legal entity or person' in its own right. It can be sued or contracted with and it can own businesses or property and carry debts and liabilities.

Companies have to trade within the requirements of the law which in N.Z is the Companies Act 1993.

The laws are in place to protect the shareholders (owners of the Company) and members of the public who deal with or invest in the Company. The laws control how a company must operate and how it treats shareholders and others.

The company can either be privately owned (the public do not have shares in it) or publicly owned (members of the public own shares in it).

Only a publicly owned company can sell its shares to the public or allow trading of its shares between members of the public. In reality the company could eventually be owned by thousands of people.

Public companies allow the public to buy and sell its shares in a marketplace known as a 'Stock Exchange'.

A public company is a convenient way for businesses to raise funds from the public when it needs investment capital. That is, members of the public invest in the company by buying shares in it.

For example - The Company might sell 10 million shares of stock at $5 a share to raise $50 million.

The company may then use the $50 million raised to buy more machinery or expand its production facilities or take on more staff to meet its growth.

The investors (the new shareholders who invested the $50 million) will look to the company to make a good profit so they can get a return for their investment by way of a distribution of those profits. The return is what is known as a 'dividend'.

The Stock Exchange is the place where the trading of these and other companies’ shares are conducted.