Let’s say a company issues 100 shares of stock and I buy 51 of them at a buck a piece. Then they produce something great and the stock price goes through the roof. Someone else comes along and pays $10 grand a piece for the other 49. I just hold on to the stock I have.
Now this other person has nearly half a million is company stock, and I have stock that’s valued at a bit more than that, but in reality I still just have $51 dollars tied up in my stock.
I’m still the majority stockholder, correct? What would something like this imply for control of the company?
You are still the majority shareholder. Assuming your shares are voting shares, and there are no other voting shares with greater voting rights than yours, you still have control of the company.
Your cost basis in the stock is still $51. Assuming the other buyer paid the current fair market value of the stock, you have stock with a current market value of $510,000. Congratulations, you have a considerable unrealized gain of $510,000 minus $51.
And, assuming that the " Someone else comes along and pays $10 grand a piece for the other 49." does it on the exchange, and not directly from the company (which is rare) the company also gains nothing- unless they issue more stock.
If they buy it through an exchange, somebody already had bought it. New shares are released by public offering, meaning they are bought directly from the company (though almost invariably you still have to go through a broker like Charles Schwab or someone).
It goes to whoever owned the stock before. So if you owned 51% of the company back when it was worth $1/share, some other parties owned 49% of the company, which they just sold to another party for $10,000/share.
If you’ve owned 51% of the company from the beginning then you’ve always controlled the company, and the fact that your 49% shareholders have changed doesn’t make any difference. You control the company because you own 51% of it, not because you invested $51 dollars in it.
In the case of a small company there is no brokerage, because the company isn’t publicly traded. You can’t buy shares of the neighborhood bakery on the stock exchange, even if the ownership of the bakery is structured as a corporation. Most corporations in the US are not publicly traded, they are small businesses owned by one or two or a few people in various proportions.
I don’t believe Schwab handles IPOs, but when you put out a new offering, a brokerage underwrites it, issuing the stock, setting the initial price, selling it directly (though it may be resold immediately), and taking care of all legalities. For this, they get a fee based upon the value of the stock.
So the broker might decide the initial price is $10 a share. It will sell it at that price, though usually to other banks and big money organization who they work with. Ideally, they will sell all the shares.
The first purchaser then turns around and sells the stock for a higher price. Eventually, a market price will be established.
They are probably acting as agents in that case but it’s not guaranteed. Charles Schwab could own the stock and sell it out of their inventory to their customer but that would be unusual for a discount brokerage firm like Schwab.
This is not quite right. Broker-dealers are often involved in the sale of privately-placed securities that aren’t listed on exchanges. In fact, if people are getting paid to arrange the private placements of securities, those people should generally be registered as a broker-dealer or a representative of a registered broker-dealer. FINRA even has a category of limited representative for people who only do private placements. Series 82 – Private Securities Offerings Representative Exam | FINRA.org
It depends. Is Schwab underwriting the stock? I’m not sure that Schwab actually underwrites stock anymore. They did so a long time ago but I think got out of that business.
If Schwab is underwriting the stock, on what basis? Schwab could be an underwriter in the stock acting on a best-efforts basis. That means that Schwab agrees with the company that Schwab will try really hard to sell the stock but it doesn’t make any guarantees. In that case, Schwab is just acting as an agent of the company. For their work, they will earn a commission on every share they sell. If you buy through Schwab, they may also be acting merely as your agent, and they get yo charge you a Commission too.
In contrast, if Schwab is underwriting the stock on a firm commitment basis, it has agreed to buy the stock from the issuer and to resell it at its own risk. This means that Schwab effectively bought the stock on spec as a principal and is on the hook if it can’t sell it to customers for what it paid for the stock.
If Schwab isn’t underwriting the stock, they could be acting as an agent between two of its customers, as agent between its customer and another person, or as a principal by selling stock that it already owns to its customer. The capacity they are acting in is disclosed on the confirmation the customer gets.
Schwab will act as a market maker, selling from or buying stock for its own inventory. It won’t buy or sell an unlimited number of shares, but for thinly traded stocks it provides some liquidity for its customers.
Sometimes the company has borrowed money, where the contract is tied to the price of the stock. Because the company has used it’s own value as security for the loan either directly or indirectly.
In these cases, loss of dollar value of stock can cause the company to break it’s loan conditions, which it has to repair by selling more stock, or failing, or breaking up, or things like that which, directly or indirectly, cause control of the company to shift to different owners or different management.
So yes, sometimes the dollar value of a stock causes change of control, and company directors and stock holders get really worried about that.
