I know to most Narrow Bridge readers this is a stupid question, but there are people out there that do not know. If you do know, I hope this helps explain more about how a share of stock comes about.
As a company grows, it needs more money to operate. There are three ways for a company to get money. 1. Sell more stuff. This is the best option but it can take a long time to build up the scale needed. 2. Take out a loan. Loans give immediate cash, but have to be paid back with interest. 3. Issue stock.
When a company issues stock, they give away part of their ownership for money. The stock issuance, called an Initial Public Offering, or IPO, is how the stock is first sold. For example, if a company sells 1,000,000 shares at $10 each as an IPO, they will get $10,000,000. If the company keeps 9,000,000 shares at the same time, the public investors now own 10% of the company and control 10% of the voting power of the company.
After the stock is sold, the company does not get any more money from it. It is a one time deal. Now there are 1,000,000 shares outstanding. These can be bought and sold by the public. If the company value increases, people are willing to pay more per share. If the company value decreases, people pay less per share. That explains the fluctuation of the stock prices in the market.
If you decide today to buy 1,000 shares of WalMart, you get a fractional ownership of the company. WalMart has 3.92 billion shares outstanding. Your 1,000 shares will give you a tiny fraction of a percent ownership of WalMart. If you add up all of the shares and multiply times the share price, you get the market capitalization, or total value of the company. WalMart’s market cap is $202.25 billion. You can buy all of WalMart today for only $202 billion! That does not take into account an increase in stock price from an increase in demand, but that is for another post.
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