Pragmatic Capitalism

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Do secondary markets affect the primary markets for stocks?

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Correct me if I’m wrong, but if companies raise most of their funding via primary markets (bank loans and bonds) then what purpose does the secondary market (mainstream stock trading) serve other than for speculation purposes?

Does any of the money speculated in secondary markets reach the company if I own say 49% of the volume of shares in the company?

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Posted by Incognito 7 (Questions: 40, Responses: 52)
Posted on 07/24/2017 3:29 AM
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There is two questions in the comment there, one question how does a company choose between bank funding and share holder funding.

And another question what role do secondary markets provide to companies issuing shares.

My observation on the second question – If shares certificates could not be sold by the primary buyer, the initial sale of them by the firm would raise less money for the firm because they would have less value to the buyer because the buyer would not be able to liquidate his holding if he lost confidence in the firm at a later date , or if he preferred to hold cash, and so as a result of that the secondary markets affects the primary markets for stocks.

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Posted by Dinero (Questions: 22, Responses: 333)
Answered on 07/24/2017 5:32 AM
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    Secondary markets exist because public companies are publicly accountable to their owners. The secondary market provides a transparent marketplace where owners and potential owners can assess their assets and consider reallocation where necessary. This is a big benefit to the public as equity ownership would otherwise be unattainable except via the private markets. Just think of all the wealth that has been made by the public in the secondary market.

    I personally think we tax the secondary markets incorrectly (all transactions should be taxed at ordinary income levels), but other than that I think the public secondary markets are an overwhelming positive development for society. Oh, and people are way too active in the secondary markets, but that’s not a problem with the market as much as it’s a user error…

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    Cullen Roche Posted by Cullen Roche (Questions: 10, Responses: 1749)
    Answered on 07/24/2017 1:25 PM
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      Question 1 “[W]what purpose does the secondary market (mainstream stock trading) serve”? Companies issue new shares all the time. Mostly in the form of stock options or rewards of shares to members of the company. These new shares are then sold by an employee, a board-director member, the CEO, collaborators, consultants, friends, etc. awarded the shares by the board of directors for any legal reason. This share dilution is sometimes ameliorated by “buy backs”. This is the compensation that accounts for the massive uneven income of folks that “work for” vs. run companies. New shares can also be used for acquisitions. The higher value allows buying up smaller companies that they could not have otherwise afforded to buy were it not for the increase in market value of the shares that are traded.

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      Posted by Dennis (Questions: 26, Responses: 263)
      Answered on 07/24/2017 3:28 PM
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        Okay, none of these were good enough answers IMO.

        The stock market IS a primary market. The primary purpose is for companies to raise capital via a primary IPO or a secondary IPO to either cash out the private shareholders and/or raise capital for capital expenditures, operations, expansion, acquisitions, mergers, etc. All of the real value is generated long before a primary IPO. Secondary IPOs are typically the domain of pipe dream hucksters in the mining and biotech industries that issue dilution shares to finance ongoing “operations”.

        The secondary purpose of the stock market is that it provides pricing signals from millions of individuals so that proper valuations can be imputed to a company and its shares which is invaluable for all kinds of things, especially mergers and acquisitions. This also feeds back into the private market for setting financing round valuations similar in kind to how real estate comparables is done.

        Of course there’s been a fundamental structural change due to Sarbanes-Oxley. Private companies no longer IPO and stay private as long as possible to avoid the overly-burdensome regulation, so that traditionally crony world is being opened up to wider public access.

        The current ICO (Initial Coin Offering) bubble is a good illustration of what an unregulated primary market is like. You have no pre-existing value to unlock. No business plan in most cases. No rights as a shareholder as you aren’t one. No legal recourse, especially if its an illegal security and not an app token or cryptocoin. But it’s showing the eventual future of IPO’s.

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        Posted by MachineGhost (Questions: 35, Responses: 592)
        Answered on 08/02/2017 6:54 PM
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