What does a company gain by becoming a publicly traded company and issuing stock? Also, how does a stock’s price affect (or reflect) a company’s economic health? Finally, stock traders are supposed to buy low and sell high – but then, who’s selling low to them and buying high from them?
A company issues stock to raise capital, they sell the stock to underwriters who sell the stock for a profit to the public in an IPO ( Initial Public Offering) so when a stock is issued for the first time at say $30 then the company is probably getting $20-25/share. They can then issue more stock on the open market at current prices, where their cost is nil but they dilute their owning percentage of company. The person selling you the stock at the low price might have:
A) bought it even lower
B) be short selling and hoping market goes other way
C) might be selling low to cover options.
These are only some of the possibilities.
Money - when you sell stock, you get paid for it.
Other stock traders, not quite so perspicacious (or fortunate).
To spread out the risk of an uncertain return. The company recieves a startup income for pursuing a iffy adventure. If it turns profitable the stock goes up, they pay dividends and reap profit in the stock that they held onto. If the price goes down the investors lose money and no divdends are paid out. They are then only out a smaller percentage of the total ventures cost, depending on how much stock they held for themselves. This is a very simplistic example, but you get the drift.
It can make all of the original owners very rich, very quickly, but I’m sure that has nothing to do with it. :dubious:
Philosophically, it legitimizes your company, it tells the world that other people (shareholders) are willing to give you money to be part of your business plan.
There are tons of books out there on this subject. Supposedly the company’s fundamentals (financial health) is reflected in its stock price. But stock prices depend on many, many things: the health of the general market, the type of business you do, world politics, the weather in Hong Kong, (insert just about anything here).
There is something called “efficient market theory” that says something like: A company’s stock price will usually be what it should be.
Well, “high” and “low” are relative terms depending on WHEN you observe.
I think “Buy low and sell high” is an in-joke.
Scenario: Callow youth asks, “Sir, how do I make money in the stock market?”
Aged tycoon answers, “Son, buy low, and sell high!” in a tone of finality, and turns away.
Nice and simple.
Youth goes away, begins to develop an inkling that those five words aren’t quite everything.
Tycoon smiles to self, knowing everyone buying and selling is putting their whole concern into discovering/guessing/lucking-out as to what is low and what is high. Simple it ain’t.
I feel like this is an economics test:
When stock first goes out for sale, the company is offering investors the opportunity to own a tiny little fraction of the company. Investors want to own a part of the company, because if the company makes a profit, they get a tiny little fraction of that profit.
So, if the investment community thought my company was worth $100 (as the sum of all my assets, liabilities, brand names, etc), and I offered 100 stocks for sale, in theory investors would give me $1 to get their hands on one of these stocks. The company then gets the cash, which it uses to expand operations and make more money to give back to the shareholders.
Once the stock is sold for the first time, it has no direct impact on the money the company has received, and the rising and falling of stock prices affects only the investors who now own them.
As for the buy low, sell high bit, it is another example of how real life does not work like any economics textbook I’ve ever seen. Investor panic can play a big role here; if everybody else is selling, the price of the stock will drop and I think I should get out of this company too - it looks like a losing proposition. Hence, selling low. When a stock is hot, and everybody is talking about it, then its price goes up, but that’s exactly when all my friends are getting on board with this great new company, and I want in too - it must be on its way up. And so, investors buy high.
Historically, we see many examples of this: the market crash of 1929 was caused by investor panic, and everyone selling as stock prices plummetted, while theory tells us they should have been buying. More recently, the American stock exchanges were closed for a few days after Sept 11 because there was fear that emotions and panic would trigger a sell off. (As an aside, modern stock exchanges have an automatic shut down mechanism to close trading if investor panic starts. They take a forced “time out” to cool investor fears to prevent another crash like 1929.)
Well, it is the essence of trading.
Perhaps you’d rather it be phrased:
“Sell higher than you buy and buy lower than you sell.”
Now we’ve accounted for shorting as well.
Of course, complaining that there’s no direction given in five words is a bit like complaining that “practice makes perfect” is a crock because it doesn’t tell you specific exercises to perform.
Perhaps this will give a little more detail to previous answers and the buy low, sell high thing.
It should be obvious that not everyone gets rich in the stock market. It should also be obvious that people who trade do not all do so in the same manner. Some people will learn everything there is to know about a given stock, it’s management, financial status, business plan, competitors and their management, etc. Some will check the P/E ratio and see if the stock is above or below the 200-day moving average. Some will use astrology. Some will follow the advice of a newsletter writer. Some will wait for the patterns on the chart to make a certain configuration. Some will be told by the fund manager that their portfolio is out of whack and regulations require them to add/drop certain stocks. Some will get an earnings report a week earlier than everyone else. Some have a monkey throw darts against the wall (it’s true!). Some will hold on for a few days longer to get a tax break and then sell no matter what. Some will have borrowed money from the broker and aren’t able to pay it back and must liquidate their positions.
As you can imagine, with these thousands of different people using thousands of different strageties will all have different ideas of what constitutes a “fair” price (or a “high” price or a “low” one). Remember, the for every buyer, there is a seller. For every winner, a loser.
Just don’t ask anyone to explain the role of the specialist in moving markets to levels of maximum liquidity and whether or not that affects the Random Walk Theory.
My former boss, who was a very smart man, never could grasp this very point. People sell for a variety of reasons. If they have invested for a college education for their child then they will cash in when it is time to do so even if they could make more money by maintaining the investment.
Others will move into a different stage of life where they have accumulated enough wealth that they want to protect it from the temporary vicissitudes of the market so they seek more stable investments at the expense of overall return. Some people will cash in when they want to buy a house or have found what they think is a better investment. And still others will have different time horizons for how long they are willing to wait to make a profit and what an acceptable level of risk is in return for potential reward.
Retirement is another time where people will cash out of their investments.
Some great trading wisdom here:
http://www.tradingresource.com/content/articles/Trading-Wisdom.html
– Lose your opinion, not your money.
– Date them, don’t marry them.
– Manage the risk and the profits will take care of themselves.
– There are more fools among buyers than among sellers.
– Know the fundamentals. Trade the technicals.
– The best time to buy is when blood is running in the streets. (Nathan M. Rothschild)
– Buy from the scared, sell to the greedy.
– Successful traders are quick to change their minds and have little pride of opinion. (Don Worden)
– I made my money because I always got out too soon. (Bernard Baruch)
– Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars. (Bernard Baruch)
– Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting. (Jesse Livermore)
– The more certain the crowd is, the surer it is to be wrong. (Menschel)
And a couple I remember …
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If you’re yellin you should be sellin, if you’re cryin you should be buyin.
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Trading stocks successfully involves long periods of tremendous anxiety interrupted by short periods of sheer terror.
Again, there are many reasons for this. One way to look at it: The people that are selling low think that the stock will go lower and the people that are buying high think it will go even higher.
Only over the long term.
When you need money, such as to finance a new venture, there are essentially two ways to get it – equity and debt. (Well, also you could earn by selling your product, but that’s typically slow.) Debt financing is loans – you give me $x, in five years I promise to pay you back your $x plus interest. Bonds are a debt instrument; you buy a bond for $x and the company or government promises that at maturity it’ll pay you the face value, which is $x plus interest.
Equity financing is financing thru stock. You sell a piece of ownership; you get $$, he gets a stake. Equity is generally more speculative than debt – if you buy stock, you lose if the company does badly but you can hit the jackpot if the company does great. With bonds, you get the same return on your investment from a gangbusters company as you do from one that’s just barely ekeing out a living (as long as it’s not so broke as to default on the loan). Therefore, if you own a company, you can raise a lot of capital through equity in a way you might not thru bonds. Plus, of course, bonds you have to pay pack.
Equity you don’t pay back, although you do give up (for all time) that percetage of the company and, therefore, a concurrent percentage of the profits when the company pays dividends. The other thing with equity which is dangerous is that if you sell too much you can end up getting your company taken over by someone who buys up more stock than you hold on to.
–Cliffy