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.)

RELATED FAQS

  1. How does the strength of the IPO market affect the drugs sector?

    Discover how the strength of the IPO market affects the drugs sector. A strong IPO market reflects healthy risk appetites ...
  2. Why are some spin-offs taxable and some are tax-free?

    Learn how spinoffs of subsidiaries from a parent company are typically done, and what determines whether a spinoff is taxable ...
  3. How does an underwriter syndicate work together on an initial public offering (IPO)?

    Learn how underwriting syndicates work together when helping a company undertake an initial public offering, and learn about ...
  4. Who are Berkshire Hathaway's (BRK.A) main competitors?

    Find out all about the main competitors for Berkshire Hathaway, a Warren Buffett-led diversified holding company with involvement ...
RELATED TERMS
  1. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  2. Path To Profitability (P2P)

    A clearly defined route to profitability as described in a business ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  6. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...

You May Also Like

Related Articles
  1. Entrepreneurship

    How Microfinance and Investment Banking ...

  2. Entrepreneurship

    Should I Have An IPO on My Business

  3. Active Trading Fundamentals

    Who are Berkshire Hathaway's (BRK.A) ...

  4. Fundamental Analysis

    Why Investment Bank IPO Valuations Go ...

  5. Stock Analysis

    Adjusting Price Charts To Secondary ...

Trading Center