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I have experience in investing and invest in several mutual funds each month, I understand the concepts of how the investor makes money from shares (either by dividend pay-outs or increases in share price). I also understand how a company initially makes money from selling shares, they... well, sell shares!

What I don't understand is how they continue to make money (from the market) once the initial shares have been sold.

Here is an example:

  • Company A goes public and creates 100 shares, the Owner keeps 50 shares and lists the other 50 on the stock market for $5 each
  • 50 shares are sold at $5 each, the company now has $250 to use for buying equipment
  • 1 year later, the share price has doubled, so the initial investors have made money and the 50 shares traded publicly are now worth $500 combined
  • Now the owner wants to raise more money through the market... how? Can they 'split' one of their shares into more shares and sell them at the new value? Isn't that just creating artificial money out of nothing?
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Now the owner wants to raise more money through the market... how? Can they 'split' one of their shares into more shares and sell them at the new value? Isn't that just creating artificial money out of nothing?

They can indeed issue more shares from nothing.

But note.

The initial shares in your point two are shares issued from nothing.

That's what stock is!

If the sense of your question is "wow, that is open to being a big scam!" that is absolutely correct. Indeed, that is the very reason public companies / shares / the markets are so highly regulated in our era. Your question is astute.

A fun thing to do is read up on the history of stock, basically in England, so that's from about 1700. Exactly as your question hints, there were endless huge, often rather ridiculous, scams and cons. Well, not really "scams", I mean, if the public is stupid enough to buy "nothing" en masse, that's life - but you will see exactly what an unregulated stock market was like!

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  • Thanks Fattie. Do you have any book recommendations about this? Sounds interesting!
    – Cloud
    Jan 8 at 15:22
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    yeah good question @Cloud .. what about Devil take the hindmost .. really any good book on 1700s Britain ... we Brits slaughtered everyone in the new world, invented markets as we know them, did a bit of pirating, founded various minor institutions such as "the USA" .. it was a lot of hurly burly. I always truly recommend the great book Free Banking in Britain Book (L White) which is about non-government monies and relates to it. And what about "Against the Gods" - awesome
    – Fattie
    Jan 8 at 15:51
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    @Fattie: Slaughtered everyone? Hardly. Even leaving out South America, and North America south of the Rio Grande, there are still lots of us here. And many of us have some ancestors who were here quite a while before you Brits showed up.
    – jamesqf
    Jan 8 at 19:33
  • @jamesqf The Piper Tomahawk was a widely manufactured aircraft
    – Cloud
    Jan 13 at 9:32
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    @Cloud: I'm well aware of that, though I chose a Cherokee myself. But what does that have to do with the question? There is an aviation StackExchange site, you know.
    – jamesqf
    Jan 14 at 3:44
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What I don't understand is how they continue to make money (from the market) once the initial shares have been sold.

As you intuit, they don't, because, of course, the purpose of business is to make money through sales; an IPO is seed capital for growth.

Now the owner wants to raise more money through the market... how?

Issue more shares. A Secondary Public Offering, if you will.

Of course, that will dilute existing shareholder value, so first must be approved by existing shareholders.

Another method, is for this "SPO" to be pre-approved, and the company having unissued shares "in their back pockets" ready to be issued when they need more money, not just when the stock price is high.

Can they 'split' one of their shares into more shares and sell them at the new value?

That's a stock split. It doesn't happen on one share; it happens on all shares.

Isn't that just creating artificial money out of nothing?

It's a neutral action, because the price of each share changes inversely with the number of shares.

For example: in a 2:1 split, the total number of shares doubles from 1 million to 2 million while the price halves from $100/share to $50/share.

Thus, before and after the market capitalization is the same.

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    The last bit isn’t true. If a company with 1 million issued shares and a market cap of $100 million issues 1 million new shares and sells them then (ignoring consultancy, underwriting and dealing costs) its market cap should now be $200 million, because it has an extra $100 million in the bank that it didn’t have before, and the share price stays the same at $100. The extra money isn’t created out of nowhere, it comes from the new shareholders.
    – Mike Scott
    Jan 8 at 15:01
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    @MikeScott you're talking about a "Secondary Public Offering", not a stock split.
    – RonJohn
    Jan 8 at 15:15
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    @MikeScott - A stock split does not change the value of the shares, the value of a company, or the value of a shareholder's position. What you are referring to is a "Secondary Public Offering". Jan 8 at 15:35
  • Thanks for the answer, quick secondary question - is there a limit to how many shares can be issued per company?
    – Cloud
    Jan 8 at 15:36
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    @Cloud Every company that issues stock has some maximum number of shares they are currently authorized to issue. That often is far fewer than the number actually issued. It usually takes a stockholder vote to increase that limit. Jan 8 at 22:34

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