How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

Chapter 22. PARTING COMMENTS

Some years ago a women's investment club invited me to their monthly meeting to explain financial statements. It was a lot of fun. These women are a savvy group of investors who pool their monthly contributions and invest mainly in common stocks traded on the New York Stock Exchange. Several of their questions were incisive, although one point caught me quite by surprise.

At that time they were thinking of buying common stock shares of General Electric (GE). Two members presented their research on the company with the recommendation to buy the stock at the going market price. The discussion caused me to suspect that several of the members thought their money would go to GE. I pointed out that the money would go to the seller of the stock shares, not to GE.

They were not entirely clear on the difference between the primary capital market (the original issue of securities by corporations for money that flows directly into their coffers), and the secondary securities trading market (in which people sell securities they already own to other investors, with no money going to the companies that originally issued the securities). I compared this with the purchase of a new car in which money goes to General Motors, Ford, or Honda (passing through the dealer) versus the purchase of a used car in which the money goes to the previous owner.

We cleared up that point, although I think they were disappointed that GE would not get their money. Once I pointed out the distinction ...