In this newsletter, we are going to discuss what stocks are, the primary stock market, and the secondary stock market.
Stocks are in essence an ownership stake in a company. If a company has 100 total shares of stock, if you own 1 share than you own 1% of the company. You own 1% of all the assets and liabilities. Technically, you have 1% of the control, but in practice you would have the ability to vote in the elections for the board of directors. The members of the board would then theoretically act in your interests.
Crucial things underlying stocks are the primary stock market and the secondary stock market. When a company need to raise money, there are 2 main ways that it can be done. The company can borrow money or sell equity. To sell equity, an investment bank is approached. The investment bank takes the equity that companies offer and arrange for it to be sold on the primary stock market. Think of how a real estate agent facilitates the sale of a property. When the equity is sold (to various institutional investors), the proceeds go to the company. The company therefore has the capital need to fund expansion or other activities, but in return they concede some control and some potential future profit.
The people who bought the equity in the primary stock market might not want to hold on to that equity forever. If that’s the case, they can sell that equity on the secondary stock market. For sales on the secondary stock market, the original company doesn’t receive any money. Think of a garage sale or other occasions where used goods are sold. When the item is sold, the original manufacturer doesn’t receive anything. However, the secondary stock market is essential to the functioning of the primary stock market. Without a secondary stock market, fewer people would be willing to participate in the primary stock market as they wouldn’t have the ability to sell their stock position if they no longer want it. Therefore, the secondary stock market indirectly provides the company money. When Dollinger Management is purchasing or selling stock in your portfolio, it is done on the secondary stock market. The price of a share of stock is determined by the balance of buyers and sellers. If more people want to buy than sell, the price goes up. If more people want to sell than buy, the price goes down.
If you have any questions about your investments, please call at any time. We sincerely hope you got value from this newsletter.
We appreciate your business and trust.
Thank-You
Dan and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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