Companies don’t make money from stock market, instead they make money from the business they operate in…… Stock market is a platform through which companies raise money to be used in their business expansion.
Companies do not earn profit directly from or through share market. Company earns profit only through its operations and not through shares.
When shares are offered to the public, its intention is to raise or borrow money from public by sacrificing its ownership to share holders. These money raised through shares are used for its business operations and for its expansion.
The financialmarkets can be classified into primary markets and secondary markets.
1. Primary Market
Whenever a company wishes to raise money by issuing common stock, it goes for an IPO (Initial Public Offering), or an FPO ( Follow-on Public Offering). Companies that are raising money for the first time by issuing stock go for an IPO, while companies that are already listed on the exchange go for an FPO.
The company, in a public offering raises money and in turn gives a part of its ownership to the shareholders. The price of a stock can be either fixed by the company or can use a book building process.
In the book building process, bids are received from interested buyers and on the basis of that, a price is decided.
All the money from a public offering goes directly to the company.
2. Secondary Market
Once the stocks have been bought by the retail investors, HNI investors and institutions, trading in the secondary market begins. The stock prices, that we see daily on TV or online, are the prices that the market is ready to pay for the stocks.
Any buying or selling here does not effect the companies finances.
Here, the company may choose to buyback its shares from the stock owners, by paying them an amount equal to or (mostly) greater than the stock's market price at that time.
Also, whenever the company announces dividendon the stocks, it is here that it is paid to the investors.
If the company wishes to increase trading in its stock, it can go for a Stock split. A stock split can be defined as splitting one stock into a predefined number of stocks. The market price of stocks comes down proportionally, but so does the value of the each individual stock. Also, even that does not have any impact on the company's profits or loss.
Also, talking about it from the accounting perspective, the money raised by an IPO or FPO is recorded not as an earning or a profit, but, it is recorded as Stockholder's equity.
