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
In practice, dumping $2B worth of shares all at once tends to crash the price, so it’s worth less as a bulk sale. It is only worth $2B if somebody else, or a lot of somebodies, pays up for it. One of the somebodies may be the company itself but not usually.
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.
You can’t sell $2billion of stock for $2billion. The price of that stock will plummet as you try to dump it.
But the value comes from buying it, not the value of the company. Also, the value of the company isn’t just its cash on hand, it’s all its assets minus its liabilities. But back to stock values, when a company sells its stock, you get the value of that stock. Then you can sell or trade it as you wish. The company doesn’t buy it back unless they choose to do so. You sell it to other investors. The value is what the investors think it’s worth.
Imagine you bought a car. When you sell it you don’t sell it back to the automaker, you sell it to another driver or maybe a dealer. That cars value is based on the market and how other drivers value that car.
When you sell a stock, you are almost never selling it back to the company that issued it. You are selling it to other people like yourself or various investment firms.
Once a company issues a stock, other than if they issue dividends, that company has nothing to do with the stock, most of the time. They issued stocks in order to raise money. All of the sales after that point are on a secondary market that has nothing to do with the issuing company.
Thanks all, I appreciate the feedback. I understand the selling to others that are looking to buy not selling back to the company. But that implies that someone wants to and is willing to buy.
You are selling candy bars at $1 each. I happen to have 50 candy bars in my locker. My candy bars are valuated at $50. I decide to sell all 50 candy bars at the same time. But today, the demand for candy bars is really low, only 10 kids want to pay $1 for a candy bar. So either I can sell just 10 of them and hold onto the rest, or I can lower my prices. I sell 20 more at $0.75, and then lower again to $0.50 and sell the rest. So my candy bars actually sold for $35, not $50.
NON ELI5 Explaination Below:
In the stock market, you place your shares up for sale in the hope that another person (not the company) pays the price you are offering. If no one wants to pay it, then you can’t sell, or you have to lower your price. That is what drives stock market prices. Also, the number of shares up for sale at every price is public, so if someone sees $2 billion worth of stock hit the market, lots of people are likely to second guess buying it, and potentially sell off their own shares. This is what causes a stock to crash.
Also, companies do not pay someone who is selling stock. Stock is exchanged between individuals as a representation of company ownership. Public companies that have stock are owned by the public.
You buy and sell stock on a marketplace. So the money comes from the buyer. The companies money is completely separate from the stock market. If the company only has 300m in assets, and it’s valued at 2 billion, that means there’s market sentiment that the company will grow, or they have strong revenue.
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