When you buy a stock in a company, does it necessarily mean that one of the shareholders is selling it to you?

By Investopedia Staff AAA
A:

There are two main markets where securities are transacted: primary and secondary. When stocks are first issued and sold by companies to the public, this is called an initial public offering (IPO). This initial or primary offering is usually underwritten by an investment bank that will take possession of the securities and distribute them to various investors. This is called the primary market. Investors participating in the primary market are thus buying stock directly from the issuing company. However, this market is usually dominated by sophisticated and experienced investors (i.e. banks, pension funds, institutional investors, etc).

Therefore, unless you are an investor participating in an IPO, you are purchasing securities from another shareholder on the secondary market (stock market), and this other shareholder probably believes that the price of the stock will decline.

A shareholder is considered to be any entity that has legal ownership of a company's shares. Having legal ownership means being recorded as the shares' owner by the company: when you buy a stock from another investor, three days after the transaction has occurred your name will appear on the company's record book, and you will be deemed the holder of record. The investor from whom you purchased the shares will at the same time be removed from the book of records.

Regardless of whether the investor selling you the stock is an individual, a financial institution or the company itself, it is considered to be a shareholder because it possesses legal ownership of the stock. The seller of a stock is forfeiting all associated rights to the shares, such as any dividends, distributions or further capital gains/losses from the shares he or she has sold.

(For more on these concepts, see Knowing Your Rights As a Shareholder, IPO Basics and Stock Basics tutorials.)

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