What happens to your money when you buy stock?
Most Americans know that they can be part-owners of huge enterprises like Amazon, Apple, McDonald’s Corporation or any other company sold in small pieces on the stock market. Owning a few shares gives investors a little bit of each business they invest in; more shares net them bigger chunks.
Where does your money go when you buy stock in a company? Who gets the cash I invest in each share I purchase? Does money go to the company whose shares I now own? Not usually. Rarely does a company issue new shares of itself to raise money for a specific purpose, such as expanding the business.
A company only receives money from its initial public offering (IPO). After that, its stocks trade on secondary markets where they’re sold to other investors. Most often, the money shelled out for shares of stock goes to the person who owned the stock before you.
Most often, money you pay for shares of stock goes to the person who owned the stock before you.
Stock brokers are like real estate agents who sell property for home owners. Through the stock market, brokers buy and sell small pieces of big companies all day long. With houses, original owners pay the builder, covering the costs of the project, along with some profit. Later, the property may be sold and resold in the real estate market a dozen or more times. That money goes from the new owner to the previous owner. The builder doesn’t make a cent on those later transactions.
If a contractor plans a whole subdivision, he parcels out pieces of property or lots, just as the stock market portions out parts of companies or shares. Each share is sold and resold by brokers, much as houses are handled by realtors.
What’s the point of buying and selling stock?
Each day, millions of people around the world log onto their online accounts or call their financial advisors or stock brokers to sell some of the shares they bought earlier. Why do they sell? Stockholders may be:
- Retired folks who need to sell some of their shares for living expenses.
- Parents who invested in stock to make money to pay for their kids’ college.
- People suffering from catastrophic illnesses faced with big medical bills.
- Individual retirement account (IRA) owners drawing out annual mandatory amounts.
While stockholders sell shares in companies for a variety of reasons, there’s usually just as many people who want to buy them. Potential buyers can be anyone who wants to invest their money in good companies that are likely to go up in value, pay dividends and share other gains with the new stock owners.
Like real estate, most successful businesses grow in value over time. When stock owners sell, new investors hope to buy some of their shares at bargain prices; then, sell it later for more. Other times the price of stock rises due to external events that make it more valuable, such as greater demand for a company’s products.
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