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 there are securities you’ll learn about in future chapters that 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 want to liquidate their shares, they redeem (sell) their shares with Vanguard (Vanguard “cashes out” the shares).
Here’s a quick video discussing the differences between negotiable and redeemable securities:
Several steps happen behind the scenes after a common stock trade executes. 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 in settlement time frames, since 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 an 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). Selling stock means giving up some ownership and control, so issuers usually do it when they need funding to grow - such as building new offices, buying equipment, or hiring employees.
After common stock is sold in the primary market, investors are generally free to trade it in the secondary market (the stock market). When investors trade with each other, a non-issuer transaction occurs. In a non-issuer transaction, the issuer does not receive the proceeds. Instead, the selling investor receives the money and gives up ownership.
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.) - is also called an additional public offering (APO). In a follow-on offering, the issuer sells additional 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 sell shares they already own. These sellers are often officers or directors who accumulated shares through their employment.
Let’s look at an issuer that has been involved in all the transactions discussed above. Meta Platforms, Inc. (ticker: META), formerly known as Facebook, launched in 2003. After gaining traction and raising money from private investors, the company raised $16 billion 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 later, the company completed its first follow-on offering, raising about $1.5 billion more. A secondary offering occurred at the same time, as Mark Zuckerberg (CEO of Meta) sold over $2 billion of stock that he personally owned.
Sign up for free to take 6 quiz questions on this topic