ELi5: Why would someome buy stocks from a share holder of a company, instead of using that money to invest in the company themselves?
In: Economics
Investing in a company involves the company giving out newly printed shares for money. The shares always add up to 100%, so the newly printed shares reduce the ownership of everyone else’s shares.
In 5-year-old language, it’s like this:
You have a pie and you want to sell it to some other kids.
You charge 6 friends $1 each for 1/6 of the pie.
Then before you cut it another kid shows up. If you offer the new kid $1 for a slice, it’s not just a deal you’re making with him. You have to re-negotiate the rest of the kids, since you’re reducing their slice (there are now 7 people so they’ll now get 1/7 of the pie instead of 1/6). Some of them might not be OK with that slightly smaller slice [1].
If you cut the pie into 6 pieces, then the new kid can buy a slice from any of the other kids. That’s a private deal between the new kid and the seller, it doesn’t affect how much pie anyone else gets.
[1] In fact, if the kids are businessmen, they’d never agree to give away something for nothing. So maybe the 7th kid has a packet of sugar in his pocket, and he offers to sprinkle sugar on the whole pie to…sweeten the deal. Now there’s division, some of the 6 kids think the sugar the new guy brings is a great value and are happy for a smaller slice of a better pie. Others think the sugar doesn’t add anything and want to tell the 7th kid to go away and find another pie.
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