How the Stock Market Works?

I have always wondered how the stock market works and I think  Bo Sanchez has explained it better than what I have read so far about it. Here you go.

Own a Great Company
When I was eight years old, I learned that my parents invested in the stock market. I overheard them say that they owned shares of San Miguel. (My father worked for San Miguel Corporation for most of his life.) I asked my father, “What do you mean by stocks, Dad?” He said, “If I bought a few shares of stock of San Miguel, that means I own a tiny part of San Miguel.” “Wow,” I gushed, “if you own a part of San Miguel, does that mean they’ll give us free Magnolia ice cream and Coke?” (At that time, San Miguel also owned both companies.) Dad shook his head. “No. It means if San Miguel earns money, they’ll give me a tiny part of their profits. They call them dividends.” “Oh, I see.” Actually, it was as clear as mud to me.

Dad looked at my face and knew I was lost. So he gave me an example. “Let’s say your mother puts up a small candy store in front of our house…” “But Dad, Mommy doesn’t like candies. She loves chocolates.”
Dad rolled up his eyes. “This is just an example!” “Then make it realistic. Let her open a chocolate store.”
“Okay! Mommy needs P50 to buy the chocolates and another P50 to buy a small table for the store. So she needs a total of P100. But let’s say she doesn’t have P100. Let’s say she only has P90. So she walks up to you and asks, “Bo, can you give me P10? In return, you’ll own 10 percent of my candy store…” “Chocolate store,” I frowned. “OK, chocolate store. So you give Mommy your P10.

At the end of the year, the chocolate store earns a nice profit of P10. So Mommy decides to share with you P1, since you own 10 percent of the store. That P1 is what you call your dividend.”  “That’s great. So you’re earning dividends from San Miguel, Dad?” “Yes, but that’s just one way of earning. The other way is through capital appreciation.” “Capital what?”

The Company Gets Bigger
“Let’s go back to Mommy’s chocolate store. Do you remember how much was the store worth?” “No.”
“How much did she need to buy all the stuff?” “P100.” “Yes. That’s how much Mommy spent to buy the
chocolates and the table. But after a year, business was so good, she decided to sell biscuits too. From the profits of the business, she bought an entire pack of biscuits worth P50. She also bought a second table for another P50. So Bo, how much is the store now?” “P200.” “And how much percent do you own?” “I own 10 percent of the store.” “That’s right. One day, your sister says, ‘Bo, I want to buy your ownership of Mommy’s chocolate store.’ What will you say?" I crossed my arms and pouted. “I’ll tell her it’s not for
sale.” “But if you wanted to sell it, how much should she pay you?” “Ten percent of P200 is P20?” I flashed a smile, “Hey, I earned P10…” “That’s capital appreciation. You pick up fast. But that’s not all…”

The Company Has More Potential
“You know how your sisters like to buy the same shoes and clothes? Let’s say your other four sisters want to also be a part-owner of Mommy’s chocolate store. Because they believe that the chocolate store will spread to 100 branches all over the world. They foresee Mom opening stores in Paris, New York, Moscow, Tokyo… So they go to you and beg you to sell them your 10 percent share. What will you do?” “I don’t know.” “Think.” “I guess they’ll gang up on me, twist my arm, pinch my ear, and whoever causes the most pain wins.” Dad rolled up his eyes to the ceiling again. “Bo, imagine if all your sisters are kneeling down in front of you, asking, ‘C’mon Bo, sell me your 10 percent ownership! Please! Pleeeeeeaaaaase!’

That was my lightbulb moment. I got it. “Hey, I won’t sell it for P20,” I said, “since they’re fighting over it, I’ll sell it for P30. Or P40. Or even P50! I’ll sell it for P100. Plus, whoever buys it from me must be my slave for the next five years.” Dad chuckled. “So you realize that the price of the stock is determined by two things: Real Value and Perceived Value. Real value means the cost of the store — how much are the chocolates and tables. Perceived value means how much are people willing to buy it. Perceived value is based on potential.
Perceived value is based on demand.”