When I Buy Stocks, Where Does My Money Go?
When you contribute to your 401K, your IRA, or just buying individual stocks through your brokerage, have you ever wondered where the money went?
Most people incorrectly assume that the money goes to the company. So for example, if you buy $1000 of apple stock, the $1000 goes to Apple. Well, this isn’t typically the case.
A good analogy I’ve heard is that buying shares in an IPO (initial public offering – when the private company goes public), is like buying a new car. Buying existing shares on the market is like buying a used car. The money goes to the person or institution that owned them before.
So for example:
If you purchase a share of, say VTI (Vanguard Total Stock Market ETF) through your TD Ameritrade account. First the money goes to the mutual fund company, (Vanguard in this instance, but only after TD Ameritrade takes a cut of your money, as a fee), and then Vanguard in turn purchases the underlying securities that make up the fund. Those securities are then bought in the open market.
The company (in this example, Apple), already received cash for their stock when their stock was first issued. But once the share is out there in the market, the buying and selling is between individuals and institutions and not the company directly.
When the mutual fund company or the individual uses cash to buy stock, it doesn’t go to the company itself. The company already received cash for this stock when it was first issued because it was the company’s stock to sell. Once the share is out in the market, you’re buying and selling between other individuals or institutions. This could be your Aunt Jemima, a hedge fund, or another mutual fund. They’re basically exchanging cash for shares and that cash goes to whomever sold those shares.
The company selling shares can also choose to issue additional stock after the IPO and sell it on the open market. Later down the road, they can choose to buy back shares at market prices (secondary offerings, exercised employee stock options, stock grants, convertible bonds, debt restructurings, etc). But that’s a whole different topic.
Hope this helps!