Stock market 101b

As I mentioned yesterday, businesses have three options to generate extra cash, the third of which is issuing stock. We also saw that a stock issue can be private, but such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

On the other hand, such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

A few years ago, a German low-cost airline went "public" and sold €1,000,000,000 worth of stock on the first day! Not bad, eh? But this is where the "stealing" comes in. They didn't take all that cash home with them. After paying fees and premiums and costs for staging the sale, they had a mere €400,000,000 to take home. I don't think it is out of line to wonder why the people who put on a sale earn more than the folks for whom the sale takes place, but that's another story.

What's worth noting, though, is that this is a one-time deal. Once those shares are in the public domain (on the stock market), they can be bought and sold and speculated with and the issuing company receives no money whatsoever when these shares change hands. If I buy some stock at the beginning, then the company takes home some of that money. If I sell them to my friend Tom a week later, I get money from Tom, but I don't have to give anything to the issuing company. They don't own those shares anymore: I did, and now Tom does.

This is the point, unfortunately, that most people miss. The issue company only has so much to do with its stock as it is concerned to keep its value reasonably high, but this is more for image than financial reasons. People who buy and sell stock do so to make money. Anyone who "plays the market", as it is most accurately described, buys stock in the hopes that the price with rise so that they can sell it later for a profit. In other words, the company should do well enough that the share price rises so they can make money. Since the issuing company's only obligation is to increase it's share price so that others can generate income, it is not truly accurate to call the stock buyers "investors". They aren't investing in the company, they are investing in themselves. Technically, the shareholders are "owners" but for the most part they are only concerned about the share price, not the working conditions, the employees, the customers, or the products or services themselves … or only insofar as these things have a positive influence on the share price.

The stock market, then, is really more like a casino than an investment, as one chief financial officer told me. What amazes me the most, though, is the amount of media coverage this particular casino gets. Fluctuations in the stock market are more often than not market players' emotional reactions to all kinds of events, but not really a sound indication of the health of the economy. I don't think it's ever a good idea to take your temperature in a casino.