When I buy a stock or share in a company, where does that come from?

Question

Are these always shares that other people are selling that day -- is it a zero-sum game? Or where else can these shares come from? Does a company determine a cap for what portion will be owned by shareholders? Is there a limit to the number of shares one can buy? I'm asking more conceptually than practically (e.g. I realize some funds have top and bottom limits.). Also, I'm most interested in smallcap stocks, for argument's sake. Let's say I buy 500 stocks in a company with a market capitalization of $1 million. If each stock is $10, what exactly am I buying?

Answer 1

That's a lot of questions.

It is a zero sum game, in the sense that the actual number of outstanding shares doesn't generally change. The vast majority of time that you buy a stock it is because some other investor has chosen to sell it. Corporations do generally hold their own stock that they have bought in the market. This is called treasury stock, and they can sell it back into the market if they choose to, but this doesn't change the number of shares outstanding. Treasury stock is included in the total number of shares outstanding.

The only limit to the number of shares you can buy is the number of shares that there are. you could, conceivably, buy all of them if you had enough money. There wouldn't really be a good reason to, because once you got 51% you would effectively own the company anyway. There are reporting and legal issues around buying up large positions in the company. Buying a controlling interest in the open market is what is referred to as a hostile takeover.

In your example, the company would have 100,000 shares outstanding. this is because the market cap is the total number of shares outstanding multiplied by the share price. 100,000 * 10 = 1 million. By buying 500 shares, you are buying 0.5% of the company. When you vote a proxy, that is how much influence you get. No matter what the stock price does, that percentage doesn't change. It will increase if the company buys back its stock, and it will decrease if the company issues more stock.

Answer 2

1) The previous shareholder.
2) Yes.
3) The number of shares is always the same unless the company decides to sell more shares.
4) Companies are owned 100% by their shareholders. If you buy all the shares of Coca-Cola then the entire company is yours and you can hire yourself as the CEO.
5) There are no limits. You can buy all the shares.
If you buy $10,000 in shares in a $1,000,000 company then you hold 1% of the company.

Answer 3

BosCFA, above, gave a good accurate answer that covers just about all your questions. I commend him.