In general, after IPO, the transactions happening on the shares will be between buyer and seller and they won't go to the Organization. And after that companies rely on their earnings, debts and secondary offerings to operate the business.
But in case of Index Funds Organizations like S&P, how do they raise money to purchase new shares?
The S&P is an index, not an index fund. Maintaining an index doesn't involve buying any shares. It requires nothing more than keeping track of stock prices. For instance, I could pick say 57 stocks, with very little programming effort track their value over time, and thus create the "Heinz 57 Index".
Index funds raise money from people who decide to invest in that fund. For instance, if I decide to invest in say "Vanguard 500 Index Fund" (VFINX), I send Vanguard some money. Vanguard then uses that money (plus the money from all the other investors) to buy shares in companies that make up the index.
I think you're conflating three different concepts. It's true that companies that issue stock don't profit from the trading of that stock in the open market, but that has nothing to do with indexes or index funds.
The S&P 500 index is just an index - it is a list of ~500 different stocks based on some criteria. It does not "own" anything - it just adds or remove stocks as needed when stocks fail to meet the criteria and need to be replaced.
Index funds like SPY get their stocks from "authorized participants" (e.g. large investment firms) that provide shares of the underlying stocks that they already own in exchange for units of the fund.
My Question is how ETFs that trade over exchange raise money?
It makes money by charging a relatively small management fee and other operating expenses for managing the fund, which is subtracted from the NAV (and thus the unit price) of the fund. SPY, for example, has a gross expense ratio of 9.5 basis points (0.095%). So if you have $10,000 in SPY units, over the course of a year, if nothing else changed, you'd see the value drop by $9.50. That may not seem like a lot, but when you consider that the ETF has a total value of $280 Billion, that means that the fund makes $266 Million annually just for buying/selling stocks on a list.
Basically your question boils down to "how does a mutual fund work?"
Simplified example:
Lets say you have $500,000 and you want to put that money to good use tracking the S&P 500 List. You could just buy $1,000 in shares of every company on that list. but then, as the value if the individual shares go up or down, any maybe some dropping out and being replaced, you´d have to come in at certain intervals to rebalance, meaning to sell some of the shares that have gone up or dropped out and using that money to buy the appropriate amount of those that have gone down or being newly introduced.
Now that is a lot of work, and you want your money to work for you, not work for your money.
So you hire somebody to do that work for you - a stock manager. Hmm, turns out he want to earn at least $150,000 a year. Well that is not good, that´s more than your average return from your investment.
So you talk to me and I have the same problem. So we pool our money, you put 500,000 in and I put 500,000 in. The manger has the same amount of work. He just have to buy double the amount of shares and we can share his wage between us, cutting costs for each of us in half. Still, much to expensive to make sense.
So we go on an take on others to put their money into the pool until we have a vast sum, say $100,000,000 for the manger to do basically still the same work. No we are talking. We only need 0,15 % of the sum invested to pay the wage, the rest of the returns go into all of our pockets.
And voila, we have created a mutual fund - specifically an index fund - of course you could also advise your fund manager not to follow the S&P 500, but pursue another investment strategy for other forms of mutuals.
