Chapter 17: Problem 14

When do firms receive money from a stock sale in their firm and when do they not receive money?

Short Answer

Expert verified

Firms receive money from a stock sale during an initial public offering (IPO), where they issue new shares directly to investors. However, firms do not receive money from secondary market transactions, as those transactions occur between investors and do not involve selling new shares by the company.

Step by step solution

Understand stock sales and stock markets

A stock sale is the process of selling ownership in a company, typically represented as shares, to investors. The stock market is a platform where investors can buy and sell shares of publicly traded companies. Stock sales can happen in two different ways: initial public offerings (IPOs) and secondary market transactions.

Explain Initial Public Offerings (IPOs)

An initial public offering (IPO) is the process where a private company becomes a publicly traded company by issuing new shares to the public for the first time. In an IPO, a company sells its shares directly to the investors and receives the money from the sale. This money can be used for various purposes, such as expanding the business, paying off debts, or funding new projects.

Explain Secondary Market Transactions

The secondary market is where investors buy and sell shares of already publicly traded companies. These transactions happen between investors, and the company whose shares are being traded does not receive any money directly from these sales. The secondary market allows shareholders to sell their shareholdings and provides liquidity, making it easier for investors to buy and sell shares without affecting the company's finances.

Identify when firms receive money from a stock sale

Firms receive money from a stock sale when they conduct an initial public offering (IPO) because they are selling new shares directly to investors. The money raised from the sale can be used for various purposes within the company, such as expanding operations or funding new projects.

Identify when firms do not receive money from a stock sale

Firms do not receive money from a stock sale during secondary market transactions. In these cases, the shares are being traded between investors, and the company is not directly involved in the transaction. Since the company is not selling any new shares, it does not receive any money from the sale. In conclusion, firms receive money from a stock sale during the initial public offering (IPO) process, while they do not receive money from secondary market transactions.