How do companies profit after initial shares have been sold?

Question

I have experience in investing and invest in several mutual funds each month, I understand the concepts of how the investor makes money from shares (either by dividend pay-outs or increases in share price). I also understand how a company initially makes money from selling shares, they... well, sell shares!

What I don't understand is how they continue to make money (from the market) once the initial shares have been sold.

Here is an example:

• Company A goes public and creates 100 shares, the Owner keeps 50 shares and lists the other 50 on the stock market for $5 each
• 50 shares are sold at $5 each, the company now has $250 to use for buying equipment
• 1 year later, the share price has doubled, so the initial investors have made money and the 50 shares traded publicly are now worth $500 combined
• Now the owner wants to raise more money through the market... how? Can they 'split' one of their shares into more shares and sell them at the new value? Isn't that just creating artificial money out of nothing?

Answer 1

What I don't understand is how they continue to make money (from the market) once the initial shares have been sold.

As you intuit, they don't, because, of course, the purpose of business is to make money through sales; an IPO is seed capital for growth.

Now the owner wants to raise more money through the market... how?

Issue more shares. A Secondary Public Offering, if you will.

Of course, that will dilute existing shareholder value, so first must be approved by existing shareholders.

Another method, is for this "SPO" to be pre-approved, and the company having unissued shares "in their back pockets" ready to be issued when they need more money, not just when the stock price is high.

Can they 'split' one of their shares into more shares and sell them at the new value?

That's a stock split. It doesn't happen on one share; it happens on all shares.

Isn't that just creating artificial money out of nothing?

It's a neutral action, because the price of each share changes inversely with the number of shares.

For example: in a 2:1 split, the total number of shares doubles from 1 million to 2 million while the price halves from $100/share to $50/share.

Thus, before and after the market capitalization is the same.

Answer 2

Now the owner wants to raise more money through the market... how? Can they 'split' one of their shares into more shares and sell them at the new value? Isn't that just creating artificial money out of nothing?

They can indeed issue more shares from nothing.

But note.

The initial shares in your point two are shares issued from nothing.

That's what stock is!

If the sense of your question is "wow, that is open to being a big scam!" that is absolutely correct. Indeed, that is the very reason public companies / shares / the markets are so highly regulated in our era. Your question is astute.

A fun thing to do is read up on the history of stock, basically in England, so that's from about 1700. Exactly as your question hints, there were endless huge, often rather ridiculous, scams and cons. Well, not really "scams", I mean, if the public is stupid enough to buy "nothing" en masse, that's life - but you will see exactly what an unregulated stock market was like!