How Does A Public Listed Company Gain Access To the Cash From the Stock Market?

When I started to learn about investing, there is one question I have in my mind. How did companies withdraw the cash when investors/traders are buying and selling the stocks? Why is it that when someone buying the stocks, then sell the stocks to someone, and since the cash is constantly flowing between the investors, just how do companies withdraw the money to use it?

What a funny question I have in my mind. Well, I think my logical cells were sleeping. It’s all logical thinking. Here’s how:

For example and simplicity, let’s imagine there is a company name by ABC Company, 2 investors – John and Zack

When ABC Company listed its stock on the stock market, John bought the stocks with $10,000 cash. Now ABC is funded with $10,000. 3 Months later, the stock that John bought is now worth $20,000 as the company is making good profit and business is expanding.

John then decided to sell the stock at $20,000 and make good profit out it. Zack comes in and is willing to buy the stock from John at $20,000 as he believes the stock will worth $30,000 in future. So now Zack bought the stocks with $20,000 cash! So now you see, the ABC Company did not have to withdraw any money to return to John as Zack is the one comes out with the money! In fact, after this transaction, ABC Company is now funded with another $10,000! Plus, John is now richer by another $10,000!

Well, the above example looks all good if ABC Company is a good company.

What if ABC Company Is A Lousy Company And The Share Price Of The Stock Drop?

Let’s do this again, if the stock that John bought is now losing its value as the company is doing badly. Now John is panicking and he wants to get out of his position and he is offering $10,000. Unfortunately, no one wants to buy it because everyone knows the company is in a bad shape and the stock is probably worth half price. John has no choice but to offer the sale of the stock at $5,000.

Then Zack feel this deal looks attractive because he believes the company will do very well in the future and the stock could worth a lot more by then. So now Zack bought the stock from John at $5,000 with his own cash! Same thing, ABC Company did not have to return any money to John, because the $5,000 is being funded by Zack. The sad story is that John is poorer by $5,000.

By the way if you notice in both scenarios, ABC Company is a sure winner. Why? In the first scenario, it gets additional $10,000. In the second scenario, it simply gets to keep the $5,000. Sweet….


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