How does a company’s stock work?
Earlene asks:
When a company starts an IPO and goes on the market, how does the company get cash for the stocks? When people and invesment companies buy a lot of shares, all that cash goes to the company, but what if the company spends all the cash received, does the stock price go down?
When a company starts an IPO and goes on the market, how does the company get cash for the stocks? When people and invesment companies buy a lot of shares, all that cash goes to the company, but what if the company spends all the cash received, does the stock price go down?
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Its like this.
When they do the IPO, the large banks and their friends and customers buy the initial offering, then they sell it later that day at a huge profit. Then the company does still have the money form the sale of shares. The stock shares can trade many times to different people or retirement plans or funds. Each share sold represents a very tiny piece of the company. If you have one share they won’t give a damn what you think. If you have a million shares, they would listen to you. If yuo own 50% of the stock, you could fire everybody say that now this company is a restaurant. If the company akes money , more people want to own a piece of it and the price goes up. If the people in charge steal all the money, the price goes down.
When a company declares an IPO, it makes an arrangement with an underwriter . When they do this, the underwriter and issuer decide on a price, and the underwriter then sells it to the public. The company recieves the procedes, and the underwriter makes the spread (difference between what the security sold for, and what the issuer receives).
Investment companies are different stories. The most popular (open-ended investment companies) are things like mutual funds. The whole use of buying shares in one is so someone else manages your securities (stocks and bonds) portfolio. They spend the money in purchasing shares in other companies, so if the underlying securities raise in price, the $/share in the investment company increases proportionally. The converse is also true.
The reason to issue stock is to raise captial. Capital sitting around is useless, so by increasing their cash through an IPO, they would spend the money (i.e. buil a new factory). So, the goal is to make money through the IPO (and if an investor thought the company wouldn’t make money through it, they wouldn’t become an owner of the company through the purchase of it’s stock).