Companies get listed to raise cash for business expansion. In doing so, the company has to share its future profits with the shareholders. Theoretically, shareholders are owners of the business. They bought into the shares because they believe the business would make money in the future and profits can be shared proportionately to the percentage of ownership.
It is important to note that the company only receives the money during Initial Public Offering. The company does not collect money from daily transactions of it’s shares. All these buying and selling of shares does not benefit the company per se. The ones who benefit are the brokers and financial institutions, who earn commissions in the process. The company can continue to raise money by issuing more shares or borrow more money. Logically, the management would choose the cheapest way to raise cash.
The stock exchange serves as a platform to facilitate shareholders to sell their shares to potential shareholders. The selling maybe due to different reasons. The original shareholders may need to raise cash for their needs or they may think the company is not going to do well in the future. They may also be due to speculative reasons, trying to cash in on price differences.
Why would people buy? I am not keen to discuss on the speculative aspect in this post. This would mean the motivation to buy is due to the confidence in the company’s future. As new owners, they are entitled a share of future profits.
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This is the approach that Warren Buffett adopts but most of us are only interested in buying low and selling high. Why the difference in attitude? I guessed there are several reasons.
First, it is very difficult to forecast the amount of money the company can make in the future. Even the CEO cannot advise you with confidence. How, as an outsider, are you able to make an accurate forecast?
Given the unglamorous frauds in the past, how many of us have the confidence to trust management to look after the shareholders. How can we trust the management and buy the shares of the companies without knowing or meeting the people in charged? How sure are you that the company would distribute dividends and only retain earnings when necessary?
A bad management can really destroy a company. But a good management does not guarantee the company can do well against its competitors. It seems like the odds are stacked against you.
Were these the reasons for the “buy low and sell high” approach toward the stock market?