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
Corporations are capitalized through the sale of stock. Capitalization means raising money to run the business. Corporations start out with a set amount of stock to sell to raise their startup money, say a million shares (it can be whatever they want.) In a small private corporation, you and your sister and your mom and dad put in $1,000 each, and you get 100 shares of stock ( example numbers.) If you need more money, you offer uncle Bob and aunt Sue part ownership of the company if they put in $2,000, for which they get 200 shares of stock. Very simple. Large corporations do the same thing, but they initially offer stock through a big investment firm that has lots of clients with money to invest. They are limited by their charter as to how many shares they can offer, so let’s say they sell all they can. Now they can’t raise any more money, because doing so would affect (water down) the ownership rights of current stockholders (owners.) If you want to own some of the company because you think it has just invented the greatest widget and will make a fortune, you can’t buy in by buying shares from the company because they don’t have any more shares to sell. So, you have to find someone who already has shares and buy them from her. Maybe she doesn’t really want to sell, but if you give her $4 per share more than she paid for her shares, she will make some money, so then she will sell them to you. It’s really hard to go around and find sellers on your own, so there are middle men (brokerage firms) who have big networks of customers who buy and sell shares for people all the time, so you put in an order for 100 shares of XYZ stock, and they match it up with someone else’s order to sell 100 shares of XYZ stock (if you agree on the price the other person wants.) There are also networks of middle men called stock markets, where middle men share information about the stocks that their customers have to buy and sell, which makes it very easy to own a little piece of a company. That is why you don’t buy directly from the company – unless they do happen to be selling some more shares, but then they use the middle men to sell those new shares, and for the same reason it gives them access to lots of buyers.
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