This is going to seem like a really stupid question...but how do companies benefit from a higher SP?
Let's just say a company floats and sells 100 shares at $1 each. People buy these shares, so the company gets $100 in return. Tommy has bought 5 of these shares. When trading commences, someone buys these 5 shares off him for $2 each, so Tommy has made a profit of $5. That profit has gone to Tommy, not the company.
So how has the company benefited from a higher SP?
By and large companies make money for the benefit of the people who initially set them up. (Sounds obvious doesn't it .?)
So consider Mr Lock, Mr Stock and Mr Barrell. They have a cool idea for a new widget. Could be anything but something new and exotic always excites interest and allows the company promoters to suggest their new idea will make absolute squillions of dollars in profit and that investors will therefore also make millions if they can get into the company.
So Lock, Stock and Barrel set up
Endless Wealth Ltd. They offer 50 million shares at 50c each in the IPO. (Initial Public offering ). At the same time because Endless Wealth represents their intellectual property, hard work and considerable business experience they give themselves 10 million shares each. They don't pay for these. They simply write themselves certificates.
They will also be the CEO, Company Secretary and General Manager of the company and will vote themselves "appropriate renumeration packages" as well as share options. The share options give them the opportunity to buy future shares at fixed prices. For example They might be able to buy a further 2 million shares apiece at say 60c for up to 3 years after the company is floated. So if the company is successful they will end up paying 60c for shares that may now be worth $2 on the open market.
To convince the public that
Endless Wealth Ltd is a great deal they will commission a stockbroker to do an analysis (based on the input of Lock, Stock and Barrel ) that suggest this company will be a real goer. The stock Brokers will circulate this analysis amongst clients like superannuation companies, investment groups and smaller investors and try to get the shares all sold before the stock is listed on the exchange. Naturally the brokers get a commission for their successful selling effort.
When the stock is listed the rest of the public see a new exciting company being born. If the brokers have done their job properly a number of new investors demand shares and are prepared to pay in excess of the 50c that the initial investors paid. Let's say it opens at 60c.
So what has happened.
1) Lock Stock and barrel have seen their 30 million shares suddenly valued at $18m. Remember they didn't actually pay a cent for these shares.
2) The people who bought the shares before listing have also made around 10c a share on paper. So a $1m investment is now worth $1.2 m. In many cases some of these investors will sell their shares quickly to new buyers and take their profit.
So the initial profits are made by the people who gave themselves millions of free shares and see a liquid market for them and the small band of initial investors who discover they can make a quick dollar selling their shares immediately after listing,
By the way Company Directors are usually unable to sell the shares have given themselves for at least a year (sometimes more) after listing.
It's worth realizing that most public companies are floated with only a hundred shareholders ( if that ) and the principals and friends of the company will generally have 40% or more of the shareholding in one form or another.
Cheers