The financial system is significantly more complex than it used to be even 10 or 20 years ago. The basic premise behind why the stock market exists is because companies need money to grow. After a company gets to a certain point they need more money to grow. A private company turns into a public company and that is when a company first appears in the stock market.
The stock market can be compared to eBay. EBay is the 21st century version of a garage sale, we have things we don't need that still have value and we want money for them.
The stock market is essentially the same thing but with companies that need capital (money) to continue growing. Eventually a company gets so large that they stop lending money from their friends, local banks, and family. They go public to receive a cash infusion they need to keep growing and compete in their industry. Once a person initially invests in a company via stock market we become part owners of the company.
Stock markets deal in shares of stock. If there are 100 shares of Google and I buy one share I therefore own 1% of Google.
This is relative because there are actually millions of shares of stock for certain companies.
Every company is placed in a group of stocks called stock indexes much like categories on eBay. If we want to purchase a camera or laptop we will look in the electronics section. When one wants to purchase a new bed we look in the furniture section. Categories on eBay vary a bit to stock indexes but to the untrained eye we can look at it the same way. The NASDAQ composite index for example is mostly known for having technology stocks. The S P 500 index is an index of the 500 largest public companies in the United States.
So once a company goes from private to public we begin to invest in it. The left over shares have value and the general public decides what that value is based on the stock market. With anything that has value one can determine a future value. This is the reason why the stock market exists and the fundamental way that professional day traders really make money in the stock market.
They buy and sell stocks based on their future value.
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