If a person owns $2B worth of stock in a company that only has $300M cash on hand. And that person decides to sell all their stock. Where does the rest of the money come from? I can’t imagine people continuing to buy shares that are put on the market so the money has to come from someplace.
In: Economics
A share of a stock is basically like joining a band’s fan club.
For the VERY FIRST SALE, the company gets the money. It’s like if you paid the band directly to join the fan club and got a membership card. Hooray. Let’s imagine they decided to let 100,000 people join for $10. That means they sold 100,000 “shares” and will make $1,000,000.
In return you get two things. One is that they’ll let you and the other people who joined vote on where they tour or what songs they write. The other is they promise sometimes they’ll use some of their money from touring and album sales to send you special exclusive fan club merch. If they aren’t making money you get nothing. If they make a ton of money they might send you something extravagant. In stocks this is called “dividends”, when a company does really well they might give some of their money to each shareholder based on how many shares they own. This is one way stocks can make money if you DON’T sell them.
Now, you paid $10 to join the fan club. Maybe the band is doing well, and someone who is a big fan but didn’t get to join REALLY hopes to get this year’s exclusive merch or wants to help vote to get a concert in their town. So they offer you $20 to transfer your fan club membership. If you take it, the band doesn’t get anything. You already paid them $10 for the membership. This person is paying YOU for the membership, and then THEY get to vote or get the merchandise.
So the stock money comes from two places:
1. If the company makes a lot of money they may pay shareholders dividends out of that money.
2. If someone buys stock, they are paying another SHAREHOLDER that money.
After the company first sells the stock, the stocks have nothing DIRECTLY to do with the company’s money. That’s why a company can be losing money, have no cash reserves, but be said to have stocks worth billions of dollars. That just means at the current stock price, if some very rich troll decided to try to buy every share, it would cost billions of dollars paid to all of the shareholders.
Sometimes that means the “worth” of the stocks is very different from the company’s financial situation. How people FEEL the company is going to do isn’t always directly tied to how it is doing.
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