My friend, Andre, said today that he didn’t really understand how the stock market worked. I thought that was odd coming from such a smart guy as he, but I offered to explain it as best I could.
“Andre, the stock markets of the world are really organized flea markets. There are goods and commodities, company’s and holdings, all offered for sale in the hopes that growth will occur and a profit can be made. Think of it this way.
Lets say my hobby is making picnic tables – really good picnic tables. I sell them at the flea market and they are so nice, in fact, that everybody wants one. I have so many orders that I can’t possibly keep up with demand. So I decide to look for some help.
I approach four friends and I tell them that if each will put up $500 dollars, I can double their money.”
“How can you be sure of THAT,” Andre asked.
“Well, I already know I have a demand for my product. But I need increased capacity to meet it. So I show them where could be if I had backing. With their $2000, I could purchase wood at a quantity discount, hire some help and make enough picnic tables to earn $8,000, based on current orders. I would pay each one back their $500 plus their profit of $5o0. That leaves $4,000, out of which I paid $1,000 for wood and my helpers. The remainder is $3,000, out of which I pay myself $1,000 and reinvest $2,000 back into my picnic table business.
That’s how the stock market works. Of course, people make it more complicated than this and there all sorts of things that actually make it so. But if you keep it simple like this, it makes it easier to understand.”
“That does help,” he said. “So what about that uranium business you’ve been talking about lately?”
“Ah, well, that’s something else. Unlike the picnic tables, whose demand could be met, uranium has a growing demand that looks to fall short on supply in the near future. We can talk about that at our next investment group meeting if you like – hows that sound?”