Well, here is the long and the short of it. When companies first decided that they could raise a bunch of cash selling “shares” of their company in bit’s called “stock,” the concept went over pretty well. In fact the idea started in New York on cargo ships in the 1600s (actually it started here in the states at about that time. Europeans had a “stock exchange” of sorts since the 1400s). People could buy “shares” of a load of cargo to be delivered. In fact, the first monies paid were often silver “pieces of eight,” and that is one reason why to this day generally 1/8 is the smallest fraction of a share sold on the New York Stock Exchange. (Although they are changing over to decimals instead of fractions, and are now trading in one-penny increments) The idea caught on pretty well and soon companies in other parts of the country began to “sell shares.” Most beginning stocks were I railroads, water companies, ranches and mines that realized they needed big money to enlarge their operations but didn’t have any way to get it. When they went to banks (which were pretty unstable 150 years ago), the bank was willing to lend money only if they got a mortgage on the entire company. That is fairly unsatisfactory, because if you missed a few payments your business was taken from you. So naturally a lot of companies looked to individuals as lenders. That worked well, but even friends want some guarantees on their money, and some type of interest payment for using their cash.
That is when the idea of selling bit’s of their company in lots called shares was started. Each share was in fact a small percentile of the actual company. The underlying idea was to figure out how much a company was worth (if they sold it) and divide that figure by the number of stock certificates they were going to sell. Therefore, if a company was figured to be worth 1 million dollars and they printed up 1 million stock certificates, each share was “worth” one dollar. By keeping 51% of the “shares” (stock certificates) a company could retain control and yet sell enough stock to raise cash for equipment and business expenses. So what did the buyer of the stock get in return for his one dollar? The companies expected earnings on a yearly basis were figured out, and “shareholders” would receive a percentage of the earnings as a “dividend” or more plainly, a payment. Now lenders (which is what stock buyers really are, lenders of cash to the company) had a return to look forward to. What a great concept!! From those humble beginnings of a few people “investing” into a particular company for the dividends the company would pay them (for as long as they were “shareholders”) came the financial markets that we enjoy today.