To what extent do funds used to purchase stock transfer to the company who's shares are being purchased?

Question

Obviously when buying shares from a public offering, those funds are basically going to the corporation making the offering; that's the whole point. So for this question we are discussing the purchase of shares of stock already issued.

EDIT FOR CLARITY: Some people have linked This, related question and suggested it is the same. My intent here is far more specific, and I am seeking evidence that challenges my understanding (should it exist). I am not interested in generic 'support' of companies. I am asking explicitly about ways in which a company might receive liquid assets as a direct (or reasonably proximal indirect) consequence of an open-market purchase of their stock.

Context: A great deal of ink gets spilled about divestment. There seems to be two lines of argument in favor of divestment as a strategy:

The first is that institutions who rely on investment income, either from endowments or for their retirement plan offerings, and hold positions in controversial industries (fossil fuels being the most visible right now, but divestment efforts have come out for everything under the sun) are perversely incentivized to support those controversial industries in order to protect their long-run interests. By divesting, they not only repair their own incentive structures, but they also protect themselves from the risk that controversial industries experience a decline.

The second, which is both more common and to my (well read, but amateur) understanding utterly fictitious, is that when you buy stock in a company, your dollars are somehow going to that company and advancing its business interests.

It is this second argument which I'm interested in exploring.

To wit: To what extent does Generic Company, Inc. receive revenue when I buy shares on the market?

Answer 1

When an institution buys existing shares in the market, the company gets no money.

Divestment does hurt a company if we assume that other institutions aren't going to perfectly replace whatever demand the divesting institution was providing. Stocks obey the law of supply and demand so institutional demand does tend to increase the stock price. The company benefits from a higher and rising stock price due to institutional demand. Companies use stock and stock options to compensate employees so companies can pay less in salaries and benefits if institutional demand is keeping their stock prices up. Companies use stock in acquisitions so higher demand for existing shares makes it easier for companies to buy competitors. So if Big Pension Fund X decides to sell off all its existing shares of Company Y and to commit to not investing any more, that will tend to depress the price of Y which will negatively impact Y's business.

Answer 2

When you buy shares on the open market the person or entity that you purchase the shares from gets the proceeds. Generally that is NOT the company itself and they get nothing from the transaction other than some indirect benefit (perhaps) that the stock price is supported as a result of a trade.

It's the same when you sell, YOU get the money and the seller of the stock provides the money you get.

The only times that a company gets the money is when during an IPO or an event where they are issuing more stock.

Answer 3

The second, which is both more common and to my (well read, but amateur) understanding utterly fictitious, is that when you buy stock in a company, your dollars are somehow going to that company and advancing its business interests.

TL;DR: The stockholders can freely move money between themselves and the company as they think best by buying shares, selling shares, voting for a dividend, and so on. Which pool you put the money in makes no difference because in either case the stockholders decide where it goes. Think of the company's money as one place the stockholders keep their money with the stockholders always moving their money around as they think best regardless.

There is no difference between aiding a company and aiding its stockholders. The purpose of a company is to benefit its stockholders. Benefiting a company's stockholders because they are stockholders is a company's purpose -- if it can do that, it has achieved its purpose. Achieving purpose is a benefit.

Companies can only succeed if people make them succeed. A company can't do anything by itself. Companies succeed if people want them to succeed and act to make them succeed. They wither and die if they don't.

When you sell a company's stock, you reduce the utility of that company for its stockholders, the only people who count. This reduces the incentive of people to put resources and effort into making the company succeed.

One could argue it's just as much a fallacy if the stock is newly-issued. While the company does have the money paid for the newly-issued stock, it no longer has the stock that it sold. Presumably, the stock is of equal value to the money paid for the stock.

The fallacy is in thinking it matters where the money is rather than what the money is being used for. Whether it's the company that has the money or the stockholders of the company who have the money is of no moment. The company will give money to its stockholders if that's what the stockholders think is best and the stockholders will give money to the company if that's what the stockholders think is best.

The point is to take money out of the entire system. Moving it slightly only incentivizes people to move it back. Capital can freely flow between a company and its stockholders as its stockholders think best -- which pool you put the money in first makes no difference.