How a Company Benefits from the Stock Market
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- Опубликовано: 4 окт 2024
- If the money doesn't go to the company when you buy shares of stock, what's the point? In this video, learn how the company itself benefits from the stock market!
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Shares held by the company can also be used as collateral when issuing debt to attain better interest rates - this can be useful when the company wants to extend it's borrowing power in a challenging economy.
This channel is underrated!! Keep them coming
Great teaching- simple and solid on how things work. Thanks
Glad you enjoyed it!
This was a fantastic video - thank you so much for making it. Would you be able to make a video going more in depth on points 5 and 6, maybe going in to some examples of CEOs/companies like Tesla issuing shares when they are overvalued and calculate how much that decision actually benefits shareholders whose shares have become diluted?
exactly what I was wondering 🤔
Great video Richard, packed with lot of information to learn. You solved lot of doubts in just one video. I hope you could explain this doubt as well please.
When company issue shares what are they giving up. They make money with issuing shares but they are not selling anything physically right. Not any property, machines or some other valuables. If a company issue 30 percent of shares to ipo. Are they really giving up 30 percent shares of the company in nany form. And if some other company is buying the whole company, does the 30 percent share holder get there money from that price. Please answer this.
I will make a video on this soon. I really appreciate the video suggestion. Keep em coming if you have more request. Here is something to help between now and when I make that video: If it was a private business with one owner, imagine the owner needing to raise cash to use to grow the business... he can borrow the money from the bank at a set interest rate, or he can sell some of the business ownership.. Let's say he sells 10% of the ownership to get the money he needs. Well he now owns 90% of his business. This means only 90% of future profits belong to him! If he chooses to pay out a dividend, he'll get 90% of the dividend, and the other owner will get their 10% of it. On the surface it sounds like a horrible idea. Why would you give up some of your ownership for cash when you can just borrow that money instead? Well the answer is that issuing new shares and diluting your ownership is most often a bad choice.. However it can sometimes be a good thing... For example: say you're the owner and you think the business is conservatively worth $1,000,000 based on a present value of future cash flows calculation... BUT you're able to sell 10% of the business for $200,000 (because someone is willing to pay that price).. well you've essentially exchanged $0.50 of value for $1.00 of cash. If the owner takes that $1 of cash and uses it to invest in something that has $1.20 of value, then he essentially turned $0.50 of value into $1.20 of value. Hope this makes sense. Please forgive any typos this was dictated but not read. Sandeep, I really appreciate your support and wish you lots of success. If you have any other questions you'd like me to cover please keep them coming because it does really help me out.
Also, If a company is buying another company in whole there will be a price negotiation process, and then, once the price is decided on by the shareholders that have a controlling interest, all shareholders will sell their shares to the acquiring company at the negotiated price.
Much appreciation. Your comments helped me out a lot.
@@IntelligentStockInvesting When you say the shareholders who have a controlling interest, who all does that include? Is it the top shareholders? Does it go by the top percentage of shareholders who own the most shares? How does that work?
@@LightofRenewal When it comes to big corporate actions they do votes and shareholders can decide. It is majority rule. If there are any very large shareholders their vote will have more weight. Shareholders elect the board of directors with votes as well. These votes usually happen at the annual shareholder meetings. large corporate action votes can happen any time. They will send out notice to the shareholders to get their votes in. The board of directors is supposed to look after the interests of the shareholders (owners). It's good when the members of the board of directors are shareholders themselves because it helps to ensure they're going to look after your best interest. board of directors hires the CEO to manage the company. When the CEO is a shareholder themselves that is also nice because it too helps to ensure they will focus on increasing per share intrinsic value.
Great video! Very informative and easy to follow 🙂
Glad you enjoyed it!
I’m confused, so when a company issues shares you buy the shares directly from the company and this helps them generate cash, but once those shares are sold and resold they don’t further benefit. Is that correct?
So, when a company IPOs (or raises cash by selling off a piece of the ownership at anytime, even if it’s not in the going public IPO way) the company benefits because it raises money and money is the life-blood of a company.
Shareholders who owned the company pre-IPO also benefit because now their shares are able to easily be sold which helps them cash out on their investment.
Once the company is publicly trading, all the back and forth trading activity doesn’t *directly* benefit the company.
However the company benefits indirectly because shares can be used almost as a currency of its own.
When the share price is high, the company can issue new shares to raise additional cash.
A company can even use their shares to buy an entire company in an “all stock deal” or exchange their shares for shares in another company rather than paying with cash for those shares.
At all times stocks are either priced higher than what they’re worth, priced lower than what they’re worth, or priced at about what they’re worth.
When a stock is priced higher than it’s worth, it’s a good time to issue shares because they’d be trading, for example,$0.80 of value for $1 of cash.
The company benefits by having this additional flexibility and option for raising money besides just borrowing the money.
If a stock’s shares are currently priced much lower than what they’re worth and the company happens to need money at that time, then it would most likely be better for them to borrow the money instead of exchanging $1.20 of value for only $1 of cash.
Hope this helps!! Thanks for your comment.
@@IntelligentStockInvesting Right so the first sale of the share does that money not go to the company directly, lets say at the IPO?
Your answer helped, thanks
@@IntelligentStockInvesting I liked how you explained it from the companies benefit and when they can renter the market to their benift
I have watched numerous videos over the last few weeks and i managed to get a few concepts here and there, but there was a point about how shares work that never made sense; I have continuously beeen searching and until I stumbled upon your video, I never found a video that quenched that knowledge gap. 6 minutes into this video, and i have grasped a comprehensive understanding in a manner completely palatable to my mind. Great video... Pulchritudinous Explanatiom. Great stuff.
Wow man so happy to hear that. Such an amazing comment to read. Thank you for sharing that with me :)
@@IntelligentStockInvesting much obliged. Been watching your videos from like 2 am since this one. For solving such a huge perplexing topic, am the one in awe. Keep posting quality explanations.
wow extremely well explained
Glad it was helpful!
Thank you for enlightening me.
My pleasure
Very informative; so it's mostly zero-sum surrounding companies raising cash.
So not necessarily actually. A CEO can exchange more value in ownership in shares than they receive in cash (or shares of another company) in return. Ideally a CEO will be smart and only issue shares when they're exchanging equivalent value for value. If a stock is underpriced by the market and shares are then issued, they could be giving away for example $1.20 of value for every $1 of cash they're receiving in exchange and this would not be an ideal scenario for the owners of the company (the shareholders) because it would leave them worse off. Hope this makes sense! I did another video on this subject as well that goes more in depth and explains this aspect more: ruclips.net/video/SLYEIBKXC80/видео.html
Companies can also raise money through a secondary offering. SPO
Make a video on why public company is better than a private company
There’s pros and cons but with public it’s easier for a company to raise cash
Great explaination!! My question is that..... Is trading in stock market a zero sum game? Means that ONE'S PROFIT IS ANOTHER PERSON'S LOSS. If yes than how it works?
In my opinion trading is zero-sum, value investing is not. If I buy some shares from you and that investment goes on to earn 12% CAGR, I'll be happy. If you take your sale proceeds and buy something that earns you 14% CAGR, you'll be happy too. Our investment growth does not require someone else to loose money. No more than you buying an ownership interest in a local business causes someone else to loose money.
Please help… What does it mean to have shares in a NON-TRADING company? Is it just a waiting game until they hopefully trade publicly?
Tangentially related point -- CEOs tend to be paid mostly in stocks so the CEO of Apple gets rewarded when stock price goes up even though a stock buyer's money isn't going directly to him
Good content, just wondering, if there is dillution from a good CEO decision, that would mean the stock is overvalued and therefore shouldn't you sell and by back after the correction ?
Thanks Mathieu, personally I’d just hold on. The CEO will buy back stock when it’s cheaper too if they’re good.
thank you
my best wishes
Happy new year 🙏
Mate amazing video. Thanks
Great video. Thanks for the amazing content 👍
No problem 👍 Glad you enjoyed it!
I don't get how they can just issue new shares out of nowhere while keeping the share price the same.
Doesn't that just increase their valuation from nothing?
Learned a lot from your content. 🙌 thank you. My question is how do long term stock investors make money in the short term if the idea is to buy and hold forever? Is the idea to have a job or some other source of income and just be happy that you on non liquid money on your trade account??
Hi Dave, my pleasure! Glad you’re enjoying it. When you plan to buy and hold forever it’s best to just let it grow and reinvest dividends so your wealth can grow faster and faster. If you spend the dividends or if you sell some shares and buy some stuff it will just slow down your progress. $1K right now could have the future value of $10K (if growing at 8% annually) or as high as 237K (growing at 20% annually)!!
So you have to decide if the $1000 item you want to buy right now is worth it from that perspective
For me, I reinvest all dividends and I keep putting money into my investment account and buying nicely priced stocks, aiming for those 20% annual gains.
When you do it this way, one day you wake up and realize that you have enough money to quit your job, live off your investments (whether that’s dividends or selling off shares as needed), and that your investments will even continue to grow because your capital is growing faster than you’re depleting it.
I really appreciate your support and your comment. Hit me up on here any time!
Great video
Thanks!
Issuing new shares means diluting promoter holdings shares? what if company with zero promoter holding, how they will benefit in stock market after listing.
I replied to your other comment :)
How market cap go down? If a curent price is 100 , I actually have to sell for last price *100 and buyer have to buy for 100* How do then market cap go down?
If there is 1,000,000 shares out and the last price is $100 the market cap = $100 x 1,000,000 shares = $100,000,000 market cap. If you then sell your shares to another investor for $100 then market cap would be unchanged.
If you sold your shares for $99, the market cap would then be = to $99 X 1,000,000 shares = $99,000,000
So how zero promoter holding benefits company in stock market,In indian stock market there are big companies with zero promoter holding like Larser & Troubro, ICICI bank ect
Thanks for you question. I think when you say "promoter shares" you're referring to shares owned by the company founder, ceo, members of the board, or other insiders... Here's the answer: The company is an entity itself and the way it benefits from the stock market is not dependant on who owns the shares. So whether 50% of the shares are held by insiders or 0% of the shares are owned by insiders, how the company itself, as an entity, benefits from the stock market does not change. When the company issues new shares the amount of cash it has increases. The cash can be used for investing etc.
Think of it this way to help you understand:
You and your brother own a company. There are a total of 4 shares, you own 3 and your brother owns 1. So, you own 75% of the shares and your brother owns 25% of the shares. You are the founder and CEO so you are an "insider" but your brother has no role in the operations of the company whatsoever. You feel the company is worth $1,000,000. Since you own 75% of the company (3 of the 4 shares) your ownership has a value of $750,000. Your friend Bob comes along and wants to buy in and wants to buy in at a valuation of $2,000,000... As the majority shareholder and decision maker you decide that the company will issues 1 new share to Bob, who pays the company $400,000 in exchange for 1 share (NOTE: he buys the share from the company, not from you or your brother).
You now own 3 of the 5 shares = 60% of the ownership, so your ownership has been diluted from 75% to 60%. Your brother's ownership is now 1 of the 5 shares, so his ownership has been diluted too, from 25% to 20%...
Also, now, the company is worth $1,000,000 + the $400,000 in the bank it collected from issuing the 1 new share to Bob = $1,400,000 company value.
Since you own 60% of the company, your ownership is worth $840,000. and your brothers ownership value has increased from $250,000 to $280,000..
You and your brother have both benefited from the company issuing a new share even though your ownership has been diluted. The company has benefited because it now has an extra $400k to invest and use to earn even more money in the future.
@@IntelligentStockInvesting great explanation, now I cleared my doubt, just one last thing i want to understand is, is there any limit of issueing new shares by company, and how it works. Want to understand this new share process. Thanks for ur reply
@@Yakazuna23 The limitation is dependant on the market demand.
@@IntelligentStockInvesting got it, i am new to stock market, understanding the concept, ur explanations helped me to understand it better, thanks again
If a company issues some shares at a fixed rate , how does those rates increase ?
Company can issue shares and sell them on the open market at the current market price or they could sell them to an investment bank who would then sell them on open market
If companies receive all the cash during the IPO why are they so beholden to shareholders? Ie what incentive do they have to make the stock price go up? Simply the opportunity to issue new shares at an overvalued price?
This is why you want the ceo to also own a large amount of stock
@@IntelligentStockInvesting some might argue companies are too beholden to investors these says, eschewing long term health for short term gains.
Depends on the ceo look at Berkshire Markel NVR etc.
Thaaaaanks a loooot!
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Nice Bro
Very informative !
Glad it was helpful!
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