Normal folks all over the world could be forgiven for not really understanding what the stock market is. Things can be bought, sold, traded, or optioned at such a dizzying pace that it’s difficult to keep it all straight within one’s head.
For instance, many people think that when they buy a company’s shares, they’re actually giving money to the company. Unless you’re participating in the initial (or secondary) public offering of a company, the money is just going to the person who’s selling you the stock. This is just one of many misconceptions about the market.
Who needs a stock market?
Imagine you’re starting up a bike-repair shop, a babysitting service, or a wedding-planning company. You might be able to start these within the confines of your own home; if you want to open an office later, you can fund any further expansion from the earnings you’ve already accumulated.
Believe it or not, these types of self-employed operations make up roughly 75% of all firms in the United States, according to the Census Bureau.
Source: U.S. Census Bureau.
Of course, those companies that actually have a payroll are likely to be bigger in scope than nonincorporated businesses. If you have more employees, it’s probably because you’ve got more stuff to get done.
There are no solid numbers on exactly how many people are employed by nonincorporated businesses, but in 2008, employers with a payroll had roughly 120 million employees, or well over a third of the American population.
According to recent estimates, there are roughly 21,000 publicly traded companies in the United States. That means that only 0.3% of all companies with a payroll — and 0.08% of all businesses in the United States — are publicly traded.
The vast majority of U.S. businesses don’t participate in the stock market, but those that do conduct a disproportionately high portion of all business every year.
Why a stock market?
Ostensibly, the reason we have a stock market is to allow companies to raise money to increase the size of their operations. Twitter, for instance, might benefit from getting a large infusion of cash. Often times when I visit the site, the system says I have to try reloading the page. I would guess that if Twitter had enough money to build out more capacity for its site, it would do it. One way to obtain that money is by going public.
Even when companies have already gone public, they can make secondary offerings on the stock market to raise money. IPG Photonics (Nasdaq: IPGP) did so this year to help build out operations to meet demand for its lasers. ATP Oil & Gas (Nasdaq: ATPG), which has run into profitability problems, announced in March plans to raise as much as US$500 million in secondary offerings to fund the general business and capital expenditures — in other words, to buy the stuff necessary to get oil and gas from the earth.
These seem like reasonable situations in which having a stock market can help a company better fulfill its purposes.
IPOs for all the wrong reasons
But sometimes – indeed, too often — companies go public for reasons having nothing to do with fulfilling their purposes. Facebook‘s (Nasdaq: FB) IPO was one of the most talked-about of the year, but going public made little sense for the company.
As Motley Fool Million Dollar Portfolio analyst Ron Gross pointed out recently, the only reason Facebook went public was because its owners numbered more than 500.
Now, Mark Zuckerberg is under pressure to quickly grow the company’s revenue and earnings. If the company wasn’t public, Zuckerberg could slowly and methodically figure out what’s best for Facebook. But because the company is now owned by millions of shareholders who are likely only concerned with profit growth, the company has to deal with Wall Street’s crazy sideshow.
The motivation had absolutely nothing to do with helping the company fulfill its purpose, and everything to do with lining the pockets of the owners. Sadly, this occurs all too often.
When you have a set group of people owning and running a business, they can take it in any direction they please. But once a company goes public, its officers oftentimes operate as if their sole purpose is to grow earnings — sacrificing healthy balance for growth at all costs. That’s why sometimes going public isn’t all it’s cracked up to be — for companies or for the general public.
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A version of this article, written by Brian Stoffel, originally appeared on fool.com
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