In England in the 18th century industrialization took hold in the rest of Europe. Products were mass-produced by factories and manufactures and systematically sold to domestic and foreign consumers. This required the hiring of new workers and the expansion of existing companies.
In their expansion, the companies resorted on the one hand to borrowed capital such as loans from banks, and on the other hand to equity capital. In the beginning, this equity capital was provided entirely by the entrepreneur. Later, however, some shareholders developed their companies into stock corporations. In these, investors could buy shares for money. This money was added to the equity of the company.
Over time, a stock market developed in almost every country in the world, with more or less features. In this stock market, investors bought in to acquire shares or sold their shares again if they wanted to take the profit. A share promises the right to future profits of the underlying company. Based on these legal principles, market prices for corporate securities emerged. The price of a share is thus not determined by the underlying companies, banks or the state, but solely by the stock market. This is based on supply and demand. If there is a lot of demand for a share, its value will rise; if it is “left behind” by investors, its value will stagnate or fall.
Stocks as a good investment
The stock market is so popular primarily because their trading products, stocks, form a good basis for a capital investment. Whereas fixed-interest investments constantly offer a low return, shares usually have a higher return than, for example, government bonds. However, the stock market is also subject to higher risks.
- For example, the deviation of company shares from their expected return is relatively high. Nevertheless, equities offer a good return in the long term.
- On the one hand, the investor benefits from the dividends that the company pays to its equity investors, and on the other hand, the investor hopes to sell his paper profitably in the future.
Current situation of the stock market
Especially in the U.S., the leading indices, like the Dow Jones are at all-time highs, which is due to the incredibly low interest rates. In fact, just a few weeks ago, the ECB lowered the key interest rate from 0.5 to 0.25 percent. The low interest rates are boosting the stock markets because the key interest rate is generally linked to the risk-free interest rate: Anyone who maintains a call money account with 0.25 percent interest, which is below the inflation rate of 1.5 percent, will be very inclined to take a higher risk and put their faith in stocks. Currently, the DAX is at 9300 points and the trend is positive in the long term. Due to the underlying situation, the stock markets can thus convince investors all over the world with their attractiveness.