Common stock is negotiable, meaning investors can buy and sell it with each other by agreeing on a price. When you buy common stock, you become an owner of the company for as long as you hold the shares. You can sell your shares at any time. Once you liquidate (sell) your shares, you lock in your gain or loss and no longer participate in the issuer’s future successes or failures.
When you buy a negotiable security, you typically buy it from another investor who is selling. For example, if you want to buy shares of Home Depot stock, you generally buy them in the secondary market from another investor - not directly from Home Depot.
If a security isn’t negotiable, it’s likely redeemable. Common stock isn’t redeemable, but a few securities you’ll learn about in future chapters are (like mutual funds and unit investment trusts). A redeemable security is bought and sold directly with the issuer, not with other investors in the market.
For example, investors purchase Vanguard funds directly from Vanguard. When Vanguard fund investors liquidate their shares, they redeem (sell) those shares with Vanguard - Vanguard “cashes out” the shares.
Here’s a quick video discussing the differences between negotiable and redeemable securities:
After a common stock trade executes, several steps happen behind the scenes. Settlement is the day the stock is “officially” in the buyer’s possession.
Most trades use regular-way settlement, which occurs on the first business day after the transaction (known as T+1: trade date plus one business day). Don’t count weekends or holidays when you’re calculating settlement time frames - settlement is based on business days.
We’ll learn more about the behind-the-scenes activity involving settlement in a future chapter.
Issuers can raise significant capital (money) by offering securities like common stock to investors in the primary market. The most notable primary market transaction is the IPO (initial public offering), which is the first time an issuer sells its shares to the general public.
Primary market transactions are also known as issuer transactions because the issuer receives the proceeds from the sale.
Companies sell securities for one primary reason: to raise capital (money). Stockholders have some control over the direction of the company, so issuing stock means giving up some control. Companies do this because growing a business can require large amounts of money - for example, to build new offices, buy equipment, or hire employees.
After common stock is sold in the primary market, investors are generally free to trade it in the secondary market (often called the stock market). When a trade occurs in the secondary market, a non-issuer transaction takes place. That means the issuer did not receive the proceeds. Instead, the selling investor (who is giving up ownership) receives the proceeds.
Other offerings can happen after a security is issued in the primary market and begins trading in the secondary market. A follow-on offering, essentially “IPO part II” (or part III, IV, etc.) and also known as an additional public offering (APO), occurs when the issuer offers more shares in the primary market after the IPO. In many cases, issuers don’t sell all possible shares in the IPO, which leaves room to sell more shares and raise more capital later.
A secondary offering can also occur, and it may not involve the issuer. Instead, large shareholders offer shares they previously obtained from the issuer. These shareholders are often officers or directors who accumulated shares through their employment.
Let’s look at an issuer that’s been involved in all the transactions discussed above. Meta Platforms, Inc. (ticker: META), formerly known as Facebook, launched in 2003. After gaining some success and raising money from private investors, the company raised $16 billion from investors in its 2012 IPO. After the IPO, the stock began trading in the secondary market on the NASDAQ exchange (we’ll learn more about exchanges in a future chapter). Roughly a year after its IPO, the company completed its first follow-on offering, raising roughly an additional $1.5 billion. A secondary offering occurred at the same time as Mark Zuckerberg (CEO of Meta) sold over $2 billion of stock he personally owned.
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