lets say a company called xyz recently got listed on the nasdaq exchange and priced at 10$ if I execute a buy order, who is exactly selling their shares? Just ordinary people like you and me? why would one buy shares priced at 10 and sell them to me for the same price? I just don’t get it…? does IPO’s play a key role here?
I often see recently listed stocks going straight down, take $BREA for example. how is this possible? why would anyone buy their shares and imminently sell for a cheaper price?
Stoke brokers generally match buyers to sellers, so normally you are buying someone else’s shares. If there aren’t enough shares for sale, then the price will go up until someone is willing to sell shares to meet the order. If you’re trading a very large chunk of stocks you may decided to do it through a private market (e.g. dark pools).
During an IPO, the create new shares that the company sells to raise money. People are buying these shares from the company until there are no more shares and people start buying each other’s shares again.
Another option for listing besides an IPO is a direct listing. Here new shares aren’t created. The privates shares by the company investors and/or employees are now publicly tradable, and they trade like a normal stock transaction.
One reason people may choose to sell quickly for a lower price is taxes. If you have pre-ipo options (right to buy stock at a given price–this is commonly how stocks are offered to employees of a start-up company), then once you exercise those options (which you generally required to do if you don’t want them to expire worthless) you have a taxable event. The taxes can be considerable. Your stocks may make you a paper millionaire, but you may have a six figure tax bill incoming. Unless you are a very high level executive (or investment bank) your shares likely have a 6 month or so lock up period during which you aren’t allowed to sell your stocks (this is to allow the upper level people to make their money without the peons putting downwards pressure on the market by selling their stocks. These peons still have the tax bill, so when the lockout period expires you’ll see a lot of selling of the stock as peons try and sell stocks to cover their tax obligations.
When the company is private, it still has shares, and those shares can be bought and sold – but often subject to the rules of the company (For example, if X (a shareholder) wants to sell their shares to Y (not a shareholder), perhaps X has to offer their shares to other shareholders first).
When the company goes through an IPO, all the shares people own will be registered with the stock exchange. Then, the shareholders can open brokerage accounts and offer their shares up for sale through the exchange – if they want to.
Also, as part of the IPO, the company usually creates a whole bunch of brand-new shares, owned by the company, and makes them available for sale at the IPO price. You and I can register to buy these shares. If the price drops immediately after the IPO, it often will not be the people who bought into the IPO, but the previous (existing) shareholders, who obtained shares when the company was private. They might well be selling at a profit, especially if they were given or offered shares when the company was just a few people operating out of someone’s garage. Or maybe they just want to cash in – it’s much easier to sell shares if the company is listed, because you don’t have to go and find someone to sell them to.
Shares are created when a corporation sells shares that don’t exist, and they’re destroyed when a corporation buys its own shares. These are called “issuing” and “buyback.”
Issuing means that a corporation raises funds by creating stock for free and selling it. This kind of sounds like nonsense, but it only happens when two groups of people agree that it makes sense to expand the business.
– The current owners have to agree how many shares to issue and want a higher price. Bringing more shares into existence means the fraction they own will have to shrink, so they want a fair amount of money to be added to the business in exchange.
– New owners have to agree that the shares are worth real money. Naturally they want to buy at a lower price.
There’s often an intermediate step: the new shares are sold to a broker in one big block and the broker plans to break them up and sell them to long-term investors relatively quickly.
There are legal requirements too. In particular: you can’t pretend that issuing new shares is actual profit from a real business – that’s a kind of Ponzi scheme.
All IPO shares are placed with initial investors before it begins trading on the stock exchange, so by the time you can execute a standard type of trade you’re buying from other investors.
Whenever *anyone* creates a company, the owner(s) create a certain number of shares that have a “par” value based on how much money was invested by the owners to create the company.
Say you and a buddy create a lawn mowing company. You each put $100 in to get started. You do the paperwork with your state, pay a fee and create “Buddy’s Mowing” with 1,000,000 (500,000 shares to each of you) shares of stock. Each share of stock would be worth $0.0002 ($200/1,000,000).
10 years later, you are the dominant mowing force in your city and you decide to go public. You find a broker to represent you, and an exchange and each of you decide to offer 100,000 shares of stock at $10. So you get $1M from the investors who buy those shares and you still each have 400,000 shares, now worth $10 each ($4M worth of stock each).