Reply #63: How.

[bluestate10]

But the premise is sadly not common for decades.

When a private company sells stock to the public via an initial public offering or secondary stock offering, proceeds from the sale go to the company's treasury, or to principles in the private company. In the case of a sole owner that has 100% control of the private company, the owner can chose to pocket some of the proceeds, or more wisely, send all to the company treasury and continue to take a salary as an executive of the company. The treasury funds can be used to finance growth of the company. Secondary trading of the stock on exchanges does nothing to change the company's position unless the company is forced to buy back it's issued stock in an unplanned action, in this case secondary trading is detrimental to company growth because it absorbs treasury funds that would have otherwise been directed to growth. What secondary trading does do, in the absence of a forced buyback, is maintain a system of speculation where one player bets on company growth, while another bets that company growth will not be robust enough to have that player forsake better profit opportunities.

What is happening in modern companies is that principles are taking funds generated by initial public offerings and pocketing the money, while still holding a percentage of company stock. Unless there is a covenant that forces a principle to sacrifice a portion of his or her cash proceeds to the company treasury, the company treasury gets nothing from the initial public offering. In the case of companies that have hot products and/or well crafted business plans, not getting money to the company treasury likely will not be an issue, but for companies with less robust products and/or less robust business plans and execution of those plans, not having treasury funds as a buffer likely mean that they either fail or are bought up by companies that are more financially stable.

Secondary stock and bond trading of business securities as has been practiced since the days of JP Morgan, serves to largely create a casino effect of money changing via the bet in favor of, or bet against mechanism mentioned above. The advent of derivatives, such as warrants and options on the base securities, have served to make the casino effect more pronounced.