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Author Topic: How Does Stock Work  (Read 3511 times)
kiba
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March 23, 2011, 03:21:09 AM
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Everytime someone buy or sell a stock, some of that money goes to the corporation to be used as capital?

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FatherMcGruder
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March 23, 2011, 03:36:06 AM
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Everytime someone buy or sell a stock, some of that money goes to the corporation to be used as capital?
I think only when they initially sell the stock.

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theymos
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March 23, 2011, 03:56:19 AM
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The trading is pretty pointless, IMO, since you're essentially trading only voting rights (unless there are dividends).

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March 23, 2011, 04:04:14 AM
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The trading is pretty pointless, IMO, since you're essentially trading only voting rights (unless there are dividends).
Why? You can sell stocks that you think will depreciate in value and buy those who’ll appreciate.

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kiba
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March 23, 2011, 04:09:28 AM
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The issuance of stock is one of the most expensive ways a company can raise capital. Money does not go to the company when it is sold between traders, only when the company initially sells the stock. However, if a company has a high stock price it appear that the company is worth more, which can be used to secure low interest loans or a bond issue, which is usually a much cheaper way to raise capital. It can get complicated.


Wouldn't it be beneficial that the company get capitals from people selling or buying?

I guess, a lot of people dislike this arrangement. For me, I think it would make sense that portion of the stock sale proceed goes to fund the company. That's speaking as investor of course.

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March 23, 2011, 04:20:04 AM
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Why? You can sell stocks that you think will depreciate in value and buy those who’ll appreciate.

Of course there is money to be made in trading them, but I don't see why anyone would ultimately want them just to own. They seem very similar to company-issued fiat currency without much backing.

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kiba
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March 23, 2011, 04:22:51 AM
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Why? You can sell stocks that you think will depreciate in value and buy those who’ll appreciate.

Of course there is money to be made in trading them, but I don't see why anyone would ultimately want them just to own. They seem very similar to company-issued fiat currency without much backing.

Without taxation, dividend looks attractive.

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March 23, 2011, 07:00:07 AM
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The issuance of stock is one of the most expensive ways a company can raise capital. Money does not go to the company when it is sold between traders, only when the company initially sells the stock. However, if a company has a high stock price it appear that the company is worth more, which can be used to secure low interest loans or a bond issue, which is usually a much cheaper way to raise capital. It can get complicated.


Wouldn't it be beneficial that the company get capitals from people selling or buying?

I guess, a lot of people dislike this arrangement. For me, I think it would make sense that portion of the stock sale proceed goes to fund the company. That's speaking as investor of course.

It wouldn't make sense for the company to get a portion of each stock sale because just like any other privately owned good, you can only sell it once.

A company goes public for a variety of reasons. Two of the main reasons are as follows:

1. To raise capital during an IPO (initial public offering). By selling off the company shares to investors in an IPO, the company raises capital to invest in its growth, pay off debt, etc.

2. Allow management and employees of the company to cash in their stock options and receive the full value of their shares. The shares of a private company are usually traded under extremely limited circumstances (e.g. from one employee to another). This being the case, under such limited circumstances, individuals with the company who own significant quantities of company shares cannot be certain of the value of each share. The shares could be extremely valuable or perhaps almost worthless. In absence of being sold on a broader market, it is near impossible to value the shares properly.
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March 23, 2011, 09:49:48 AM
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A company goes public for a variety of reasons. Two of the main reasons are as follows:
The main reason by far is that it makes it easier for owners to sell (and implicitly buy) shares. Combined with the fact that the laws about distribution of information is much more strict for public companies in most countries, it makes the shares much more attractive. This results in higher share prices.
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March 23, 2011, 08:30:14 PM
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The great majority of companies pay dividends, and that is what gives the stock its value.

New tech companies often don't pay dividends, but (believe it or not) their stock value comes from the expectation that they will pay dividends someday.


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March 24, 2011, 09:22:43 AM
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The value of tech stocks comes from their status as legalized gambling, and from the US government giving free drugs to old people that induce compulsive gambling and give said government a cut in the form of tax revenues.

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March 27, 2011, 01:03:03 AM
 #12

Stock in a company represents a share in the ownership of the company.  You have a financial (common and preferred stock) and voting interest (common stock).  The profit (revenue minus expenses) of the company accrues to shareholder equity.  The shareholder and management of the company may periodically elect to return shareholder equity to the shareholders as a dividend, or reinvest it in the company (to expand future revenue and profit).  Growth companies, perceiving opportunity by reinvesting, often do not pay a dividend.  More established, low growth companies usually pay profits out as a dividend to shareholders.

When a company does it's initial public offering, the company is able to raise money by issuing and selling new stock.  Current stock holders are usually able to sell some of their shares in an IPO, but usually only a small percentage (there is a lock out period).  The trading of stock once issued doesn't generate income for the company, however it does provide needed liquidity in the event the company does need to raise capital (they can issue and sell new shares).  Conversely, companies will sometimes buy back shares if they believe the current price is too low and they have excess capital (in a way, it's an alternative to issuing a dividend).

It's interesting that some compare stock to fiat currency.  In a way, it's true...by holding stock in a company, you are investing in the future success of that company.  By holding fiat currency, you are investing in the broader economy that uses the currency (if central banks didn't have a habit of inflating away the value of currency, it probably would be a good proxy for the performance of the overall economy).  It's interesting that people hold a view that fiat currency and stock have little backing them.  That's not true in either case (just as it's not the case with bitcoin).  The problem with fiat currency (and with some stocks) is that the issuing entity keeps printing more.  In the case of stocks, at least new issuances (secondary offerings) are offered to anyone willing to buy them (though often there are large investors that get preferential treatment in IPOs or secondary offerings).  In the case of currency, the newly printed money enters through a select few large banks (thereby creating a transfer of wealth from current holders of the currency to the recipients of the newly created money).

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March 27, 2011, 05:45:14 AM
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The trading is pretty pointless, IMO, since you're essentially trading only voting rights (unless there are dividends).

Well, the amount of the dividends are voted during general assembly.  So voting rights matter.
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April 12, 2011, 06:36:28 AM
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Everytime someones buys or sells a stock, some of that money goes to the corporation to be used as capital?

A stock on the NYSE is suppose to represent ownership in a public corporation.  If you own 10,000 shares in a stock with 100,000 shares diluted outstanding.  You own 10% of the company.  Small shareholders can be screwed by the large shareholders as well as the CEOs. 

When you trade stocks all you are doing is transferring ownership.
benjamindees
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April 12, 2011, 04:06:49 PM
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It's not really accurate to say that stocks represent ownership.  New stocks can be issued, diluting the value of existing stocks.  No benefits (dividends) need necessarily accrue to stockholders.

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FatherMcGruder
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April 12, 2011, 04:29:28 PM
 #16

New stocks can be issued, diluting the value of existing stocks.
Yes, but newly issued stock always existed, the company just hadn't already sold it.

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benjamindees
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April 12, 2011, 04:59:06 PM
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Yes, but newly issued stock always existed, the company just hadn't already sold it.

Not true.  They can print new shares at any time.

http://www.fool.com/investing/high-growth/2006/04/28/foolish-fundamentals-stock-dilution.aspx

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FatherMcGruder
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April 12, 2011, 05:05:52 PM
 #18

That's awful. I always thought that companies would just split their stock if they needed more units.

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tomcollins
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April 12, 2011, 05:40:05 PM
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That's awful. I always thought that companies would just split their stock if they needed more units.

They can also buy back stock too.  Although buy backs don't really have any impact on the value of a company, since they have less cash even though there is less stock, so less value is there.
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April 13, 2011, 05:25:52 PM
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That's awful. I always thought that companies would just split their stock if they needed more units.

Don't worry, they promise to only do it when it is in your best interests.  I thought you agreed that consent was not a good factor by which to judge an outcome?

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