Shares outstanding

[SanMiguel]

Common knowledge seems to be that the market is neutral, ie for every buyer there is a seller and for every winner there is a loser. It's not quite that exact as when you place a buy trade you may be buying off someone who is just closing for a profit even though price may have further to go and you will then close for a profit as well but overall the market is neutral.
At what point in the process might you actually be buying shares from the company that put them on the market for the original purpose as a way of transferring investment money to the company - who sells shares on behalf of the company or are the shares just present in the system for the market maker to make use of?
On sell days, doesn't the market maker have to keep offering shares even though they will make a loss on the day?

 

[amit1986]

An interesting question - I'll try to answer it in pieces:

Common knowledge seems to be that the market is neutral, ie for every buyer there is a seller and for every winner there is a loser. It's not quite that exact as when you place a buy trade you may be buying off someone who is just closing for a profit even though price may have further to go

Theoretically, It actually is the case that for every loser, there is a winner, and vice-versa. It is true that you can buy stock XYZ from another individual who could be selling it at a profit. However, if the stock is still going up, then the concept of opportunity cost arises - the individual's a loser in the sense that he lost the ability to make more profit.

At what point in the process might you actually be buying shares from the company that put them on the market for the original purpose as a way of transferring investment money to the company - who sells shares on behalf of the company or are the shares just present in the system for the market maker to make use of?

I don't think anyone can ever buy shares from the company itself if the company puts them on the market for the purpose of raising capital. In order for the company to increase its float, they must go to an investment bank who would underwrite more shares. The investment bank then purchases these shares from the company (at a large discount from the market price, most likely) and sells them to clients on their books or on the market. Keep in mind, bankers know traders at other firms, so it could be possible for bankers to sell shares to market makers before the market even trades them. But I am sure goldman cannot issue more shares of a company and sell them to other goldman traders to make a market of those shares as this would raise the whole "conflict of interest" issue.

On sell days, doesn't the market maker have to keep offering shares even though they will make a loss on the day?

This is true. Market makers have to, no matter what, make a market in their designated stocks. But they don't necessarily have to end at a loss all day. Most stocks don't continuously go down - there are several retracements along the way. Market makers would often not be bidding a lot on a stock they see is falling rapidly. Once they see a large amount of sell orders being executed, then they start bidding and buying all the stock at a low price. At this point, they are in a loss. However, since there are no sellers left, the price starts to retrace and the market maker starts to liquidate their position (hence the term "volume blow-off"). The VWAP really works in their favor!

Hopefully I've been right about what I've said, but if not, someone should clear it up

 

[arabianights]

Warning, amit'86 seems to know what they're talking about (they've also been accused of being a decent chap).

Suggest burning at stake for first offence.

 

[amnonco]

what Amit answered is pretty accurate.

just a couple of notes:
1. there's what's called a secondary offering, where company would issue more of it's own shares (or even totally new shares), and you could if you wanted participate in the offering (via your broker). then you actually buy "new" shares (of course, it's from the underwriter).

2. stock market compared to derivatives and FX (futures, options ans such) is not a zero sum game. yes for every buyer there's a seller, however there are dividends.
at a specific time, all holders of company shares profit from doing so.

 

[SanMiguel]

This is true. Market makers have to, no matter what, make a market in their designated stocks. But they don't necessarily have to end at a loss all day. Most stocks don't continuously go down - there are several retracements along the way. Market makers would often not be bidding a lot on a stock they see is falling rapidly. Once they see a large amount of sell orders being executed, then they start bidding and buying all the stock at a low price. At this point, they are in a loss. However, since there are no sellers left, the price starts to retrace and the market maker starts to liquidate their position (hence the term "volume blow-off"). The VWAP really works in their favor!

Hopefully I've been right about what I've said, but if not, someone should clear it up

Is the market maker relying on the fact that the stock will return to an equilibrium point at some stage? They want to be buying the stock from sellers on the way down and taking a cut/spread and then they want to be selling the stock to buyers on the way up and taking their spread.
Can't they get into trouble say in a down year for the markets?

 

[Jaydee]

Is the market maker relying on the fact that the stock will return to an equilibrium point at some stage? They want to be buying the stock from sellers on the way down and taking a cut/spread and then they want to be selling the stock to buyers on the way up and taking their spread.
Can't they get into trouble say in a down year for the markets?

Typically, market makers don't hold positions in illiquid stocks for too long. They are often just looking for quick turns within a few minutes pocketing the spread each time. As they are obligated to buy stock from a seller or sell stock to a buyer, if the market is strongly directional, they want to turn over stock as quickly as possible so they don't hold too much on risk.

 

[SanMiguel]

what Amit answered is pretty accurate.

just a couple of notes:
1. there's what's called a secondary offering, where company would issue more of it's own shares (or even totally new shares), and you could if you wanted participate in the offering (via your broker). then you actually buy "new" shares (of course, it's from the underwriter).

2. stock market compared to derivatives and FX (futures, options ans such) is not a zero sum game. yes for every buyer there's a seller, however there are dividends.
at a specific time, all holders of company shares profit from doing so.

In other words, when people "invest" in a company none of their money actually goes to the company directly at all as the company has already offered their shares and been given money by either a bank, market maker, etc.

 

[Jaydee]

In other words, when people "invest" in a company none of their money actually goes to the company directly at all as the company has already offered their shares and been given money by either a bank, market maker, etc.

Correct. The only time the company receives money from equity purchase is in the IPO (Initial Public Offering) stage where the company is about to float on a stock exchange. Once the share is listed, however, it is transferred from investor to investor without affecting the company balance sheet.

 

[amnonco]

a quick note - the company may offer shares more than once to the public (thus diluting public holdings), but receive the funds for that offering.

 

[SanMiguel]

Correct. The only time the company receives money from equity purchase is in the IPO (Initial Public Offering) stage where the company is about to float on a stock exchange. Once the share is listed, however, it is transferred from investor to investor without affecting the company balance sheet.

So, what are shares outstanding as listed in the balance sheets / quotes data?

 

[Jaydee]

They are the total number of shares currently tradable on the secondary market = the number of shares from IPO + any rights issue/secondary issues - any shares bought back for cancellation by the company.

 

[SanMiguel]

They are the total number of shares currently tradable on the secondary market = the number of shares from IPO + any rights issue/secondary issues - any shares bought back for cancellation by the company.

Why name them outstanding? It sunds like nothing has been done with them and they are just lying about waiting to be picked up by someone
So, it's the same as Shares issued?

 

[meanreversion]

I'm keen to know what ODT's opinion is on the matter, it won't be long before he chips in.

 

[Jaydee]

So, it's the same as Shares issued?

Yep