If the money invested in the stock market for buying shares for a specific company is not reinvested in the business, then what is the Purpose of the stock market?
If the money invested in the stock market for buying shares for a specific company is not reinvested in the business, then what is the Purpose of the stock market?
There are two things:
1. Buying shares in stock market from someone else. E.g. Mr. Z has 1000 shares of ABC which he sells to Mr. Y. This money goes into pockets of Mr. Z, not to the company directly.
2. Buying shares directly from company, means investing in it. This money goes to the company. By the ways companies takes benefits of scenario 1 too because it pushes price of their shares. So they have options to release more shares.
Stock market is still essential in providing liquidity (ability to trade shares quickly without causing significant loss to business), price evaluation (supply and demand dynamics), investment opportunities (new investors and diversity), wealth creation (growth of economy) and better governance of companies (transparency). It also helps companies in their future stock offerings.
If the money invested in the stock market for buying shares for a specific company is not reinvested in the business, then what is the Purpose of the stock market?
Before adopting option of "reinvestment" it should be noted that it is highly dependent upon the cash flows available with the company. Assuming a company is generating a good amount of free cash (by going through the cycle of Sales --> Profit --> Cash)
There are two approaches:
1- Companies give payouts to the shareholders in the form of dividends, bonus shares etc.
2- On the other side, some companies may use the same cash for expansion of business (this is also giving benefit to the shareholder in the long run). --> this is reinvestment by the company
if you are talking about shareholders "reinvestment" then in scenario 1, once the dividends are received in your account you can reinvest on your own. However, in scenario 2, it is reinvested automatically.