BizNet OnLine Magazine, Mr. Money Know' s, Mommy, where does stock come from?

Mr. Money - Know' s
By: Dana Goldfarb
Financial Writer
dana@biznetonline.com

Mommy, where does stock come from?

The stock market sure has become a popular place in the last few years. Hundreds of millions of shares are being bought and sold every business day. That’s and incredible amount! I work with one veteran broker who remembers when it was a big deal if the Pacific Stock Exchange recorded 100 shares in a day. In a day! When I started in the business in 1979, 30 million shares traded in one day on the New York Stock was a big deal. Today, more than 30 million shares of Microsoft can trade before lunch time. But where did all of these hundreds of millions of shares, that represent thousands of companies, come from in the first place? How were they created? They came from corporations that were created to make a new or better product, or provide a new or better service. We Americans, are very good at this. As an oversimplified example, let’s say I came up with this great idea for a gizmo that would make my lunch every morning, neatly pack it in a bag and have it waiting for me when I walked out the door. I’ve made my prototype, and I know it works. I’ve done my marketing study and I know it’ll sell. I’ve done my business plan and I know I don’t have the money; I need outside capital. So, what do I do? I decide to offer people an opportunity to buy a piece of Gizwich Corp., the company that I have created to produce my new gizmo. Each piece of the company will represent one share of stock. Let’s also say $100,000 is all the money I need to get everything up and running - production, advertising, rent, payroll, etc. (remember this is just an example). I decide to slice up that $100,0000 chunk - my market capitalization - into 10,000 shares worth $10 each and sell them to investors in an initial public offering. These investors will now become part owners, or shareholders in common, of the new company. The company has obtained the $100,000 it needs to start manufacturing, and the new shareholders can look forward to making a good return on their investment. Or can they?

After the initial public offering, the price of the stock probably will not remain $10; it will begin to fluctuate based on investor’s views of the company’s prospects. If the original investors become disillusioned over the prospects of Gizwich Corp., they may want to sell their shares. If there are more sellers of the stock than there are buyers, then the stock price will go down. On the other hand, if potential investors believe that the future is bright for the company, they will be willing to pay whatever the current price is for the stock. If there are more of these buyers for the stock then there are sellers, then the price per share will go up. The higher price will entice more of the current shareholders to sell their shares to meet the demand of the new investors. This trading of shares after the initial public offering is called secondary trading, and is conducted in the secondary market. The New York and American Stock Exchanges and OTC

(over-the-counter) are examples of secondary markets. And in the secondary markets stock prices rise and fall based on supply and demand.

So, there are the basics, the real basics. But it’s the basics that provide you with the opportunity to participate in the growth of thousands and thousands of American and foreign corporations like Gizwich Corp.

I think I’ll go make a sandwich.

Dana Goldfarb is a broker for Sutro & Company In Woodland Hills Ca.
And Can Be Reached At (818) 313-8700

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