Where Does The Money Go When You Buy A Stock?

In this video, you will learn where the money goes when you buy a stock. You will also learn about the IPO process, what happens when companies issue new shares and stock dilution.

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TIMESTAMPS

00:00 What you will learn in this video
In this video, you will learn where the money goes when you buy a stock. A common misconception is that it goes directly into the bank account of the company... but that's not how it works.

00:31 Where the money goes explained
When you buy shares of stock you are buying them from someone else that owns them. That "someone else" can be another individual investor like yourself or another entity that owns those shares like a pension fund or bank or another company etc. Regardless, when you buy shares you are buying them from "someone" else that owned them. So, the money is going from you to the current owner of the shares, and in exchange, you receive the shares and are the new owner of those shares.

02:11 Bid and Ask price explained
When you look at a stock quote you will notice a BID and ASK price. BID and ASK prices are based on live real-time open orders on the market. The BID price is the highest (open order) price a buyer is willing to pay for the shares at any given moment. The ASK price is the lowest price a seller is willing to sell for at any given moment.

02:38 How stock prices are determined
Share prices are based on whatever they last traded for. That's right... The price for a share of stock is determined by whoever traded it last and the price that the transaction happened at.

02:58 How successful investors think about price
While plenty of stock buyers look at nothing but the price relative to its price in the past as a way of making a buying decision... Successful investors use their own judgment to determine what it's worth, and then will they look to see if it's priced attractively.

03:27 IPO's (Initial Public Offering)
When a private company goes public it goes through the IPO process with the help of an investment bank. On the IPO date, the shares are publicly tradable.

04:43 Warren Buffett's take on IPOs
Buffett suggests investors don't buy IPOs because chances are you'll be overpaying. In other words, IPO prices are often higher than the true value of the company and its shares. Of course, this isn't the case 100% of the time.

05:37 Why companies issue new shares
Companies issue new shares to raise money. Just like their reason for IPOing. Issuing new shares is a way of raising money without taking on debt.

06:30 What new share issuing means for shareholders
When new shares are issued your ownership percentage of the company decreases. You own the same amount of shares but the total number of shares has increased so your percentage of ownership has decreased!

**NOTE: if you own 1000 shares and there are 1,000,000 shares outstanding you own 0.1% of the company. If the company issues 200,000 new shares you will now own just 0.08%.**

07:26 How the numbers look for new share issuing
In this section, I provide a breakdown of how the numbers look as new shares are issued using a $10,000,000 company before and after.

08:10 Share dilution
Share dilution is when your ownership of a company is diluted by new shares being issued. Your percentage of the total has decreased.

Special thanks to my incredibly beautiful, smart, and creative girlfriend, Stephanie, for her editing wizardry and creative insights and ideas.

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Видео Where Does The Money Go When You Buy A Stock? канала Richard Hopkins