How does the purchase of shares on the secondary market benefit the issuing company?

Question

Purchasing common stock is often described as making an investment in the company. In exchange for this investment, you receive shares of the company's profits and, hopefully, you see some capital appreciation over time.

This explanation would make perfect sense if you were paying the company in exchange for a share of the ownership. But since you're simply purchasing a share from some random person, how does this purchase help the company? How is a purchaser "investing" in the company, if the company will never see the money the investor pays?

Answer 1

Stock trading (as opposed to IPO) doesn't directly benefit the company. But it affects their ability to raise additional funds; if they're valued higher, they don't need to sell as many shares to raise a given amount of money.

And the stockholders are part owners of the company; their votes in annual corporate meetings and the like can add up to a substantial influence on the company's policies, so the company has an interest in keeping them (reasonably) happy. Dividends (distributing part of the company's profits to the stockholders) are one way of doing so.

You're still investing in the company. The fact that you're buying someone else's share just means you're doing so indirectly, and they're dis-investing at the same time.

Answer 2

First, the stock does represent a share of ownership and if you have a different interpretation I'd like to see proof of that.

Secondly, when the IPO or secondary offering happened that put those shares into the market int he first place, the company did receive proceeds from selling those shares. While others may profit afterward, it is worth noting that more than a few companies will have secondary offerings, convertible debt, incentive stock options and restricted stock that may be used down the road that are all dependent upon the current trading share price in terms of how useful these can be used to fund operations, pay executives and so forth.

Third, if someone buys up enough shares of the company then they gain control of the company which while you aren't mentioning this case, it is something to note as some individuals buy stock so that they can take over the company which happens. Usually this has more of an overall plan but the idea here is that getting that 50%+1 control of the company's voting shares are an important piece to things here.