In which circumstances does buying a company's stock actually benefit that company?

Question

If I buy a company's stock, the money that I spend does not actually go to the company itself, but to whomever owned that stock last, right?

What if I want to use my power as an investor to actually help companies that I like and I feel good about? What if I want to make my investment help that company directly by giving it an infusion of capital to use in R&D, innovation, etc, rather than just line the pocketbooks of third party investors?

I understand that a company's IPO is a good time to do this, because the money raised from sales of stocks in an IPO goes directly to the company, right? And when companies sell new stock later on (not an "initial" public offering, but a subsequent public offering (?))?

But is there any other time or other circumstances when my investment directly raises money for that company, or am I stuck just trading symbolic pieces of paper with third party speculators?

Answer 1

IPOs and other offerings are when the company actually receives funds for shares sold.  However, even when stocks are trading on a secondary market, the theory is that the more widely held, actively traded a stock is, the lower the company's cost of equity capital is.  Liquidity is a good thing, and that will be inputed into the company's stock price the next time it offers shares to investors.

Answer 2

I just wanted to point out that even at the IPO the money does not go to the company. The amount of money that the company gets has already been set by the underwriter. The underwriter then sells batches of shares to brokerage houses and institutions. They in turn sell the shares to you and me if we're lucky enough to get in on the IPO. Once the company signs with the underwriter they no longer realize any financial benefit from a rise in the price of their shares, other than the fact that it would  affect  the price of any shares that they may choose to issue in the furure.

Answer 3

I think you should not view your participation in the secondary market as lining a third party speculators pocket.

The company benefits in other tangible ways by having a active secondary market:

- The fact that there is a secondary market allowed the company to raise the money with an IPO. In fact, this may have allowed them to issue shares at a premium as opposed to a private placement.

- You may be buying stock from a long term investor (not a 3rd party speculator) who may be exiting the investment due to a fund mandated liquidity event

- Continued participation in the secondary market for a company share will potentially reduce the cost of future capital needs. That is, they will have to issue fewer shares to raise the necessary capital.

So be it the primary market or the secondary market, your investment actual helps the company. If not for a thriving secondary market, you can bet that USA would not have been half as prosperous. Just compare it to any country without a well developed secondary market - see what the costs of raising capital there are?