What happens to internal stock when a company goes public?
You'd likely be subject to a lock-up period before you could sell the shares along with possibly having other rules about how you could sell your shares as you'd likely be seen as an insider that may have information that gives you an unfair advantage for selling the stock possibly. Depending on how far in advance you hold the shares, you may or may not have adjustments in the valuation and number of shares as some companies may do a split or reverse split when preparing for an IPO. A company I worked for in the late 1990s had an IPO and my stock options had a revised strike price because of a reverse stock split that was done prior to the IPO.
"In an IPO (initial public offering) or APO (additional public offering) situation, a small group of stakeholders (as few as one) basically decide to offer an additional number of ""shares"" of equity in the company. Usually, these ""shares"" are all equal; if you own one share you own a percentage of the company equal to that of anyone else who owns one share. The sum total of all shares, theoretically, equals the entire value of the company, and so with N shares in existence, one share is equivalent to 1/Nth the company, and entitles you to 1/Nth of the profits of the company, and more importantly to some, gives you a vote in company matters which carries a weight of 1/Nth of the entire shareholder body. Now, not all of these shares are public. Most companies have the majority (51%+) of shares owned by a small number of ""controlling interests"". These entities, usually founding owners or their families, may be prohibited by agreement from selling their shares on the open market (other controlling interests have right of first refusal). For ""private"" companies, ALL the shares are divided this way. For ""public"" companies, the remainder is available on the open market, and those shares can be bought and sold without involvement by the company. Buyers can't buy more shares than are available on the entire market. Now, when a company wants to make more money, a high share price at the time of the issue is always good, for two reasons. First, the company only makes money on the initial sale of a share of stock; once it's in a third party's hands, any profit from further sale of the stock goes to the seller, not the company. So, it does little good to the company for its share price to soar a month after its issue; the company's already made its money from selling the stock. If the company knew that its shares would be in higher demand in a month, it should have waited, because it could have raised the same amount of money by selling fewer shares. Second, the price of a stock is based on its demand in the market, and a key component of that is scarcity; the fewer shares of a company that are available, the more they'll cost. When a company issues more stock, there's more shares available, so people can get all they want and the demand drops, taking the share price with it. When there's more shares, each share (being a smaller percentage of the company) earns less in dividends as well, which figures into several key metrics for determining whether to buy or sell stock, like earnings per share and price/earnings ratio. Now, you also asked about ""dilution"". That's pretty straightforward. By adding more shares of stock to the overall pool, you increase that denominator; each share becomes a smaller percentage of the company. The ""privately-held"" stocks are reduced in the same way. The problem with simply adding stocks to the open market, getting their initial purchase price, is that a larger overall percentage of the company is now on the open market, meaning the ""controlling interests"" have less control of their company. If at any time the majority of shares are not owned by the controlling interests, then even if they all agree to vote a certain way (for instance, whether or not to merge assets with another company) another entity could buy all the public shares (or convince all existing public shareholders of their point of view) and overrule them. There are various ways to avoid this. The most common is to issue multiple types of stock. Typically, ""common"" stock carries equal voting rights and equal shares of profits. ""Preferred stock"" typically trades a higher share of earnings for no voting rights. A company may therefore keep all the ""common"" stock in private hands and offer only preferred stock on the market. There are other ways to ""class"" stocks, most of which have a similar tradeoff between earnings percentage and voting percentage (typically by balancing these two you normalize the price of stocks; if one stock had better dividends and more voting weight than another, the other stock would be near-worthless), but companies may create and issue ""superstock"" to controlling interests to guarantee both profits and control. You'll never see a ""superstock"" on the open market; where they exist, they are very closely held. But, if a company issues ""superstock"", the market will see that and the price of their publicly-available ""common stock"" will depreciate sharply. Another common way to increase market cap without diluting shares is simply to create more shares than you issue publicly; the remainder goes to the current controlling interests. When Facebook solicited outside investment (before it went public), that's basically what happened; the original founders were issued additional shares to maintain controlling interests (though not as significant), balancing the issue of new shares to the investors. The ""ideal"" form of this is a ""stock split""; the company simply multiplies the number of shares it has outstanding by X, and issues X-1 additional shares to each current holder of one share. This effectively divides the price of one share by X, lowering the barrier to purchase a share and thus hopefully driving up demand for the shares overall by making it easier for the average Joe Investor to get their foot in the door. However, issuing shares to controlling interests increases the total number of shares available, decreasing the market value of public shares that much more and reducing the amount of money the company can make from the stock offering." "I used to be in research department for big financial data company.   Tell your son that there are three factors: Most people think that net sales vs. expectations is the only factor.  It might not even be the biggest.  It is simply how much money did company make.  Note that this is not how many units they sold.  For most companies they will have adjustable pricing and incentives in their sector.  For example let's talk about a new company selling Superman Kid's Bikes (with a cape the flips out when you hit a certain speed).  The company has it in Walmart at one price, Target at another, Toys R' Us even cheaper, Amazon (making more profit there), and other stores.  They are doing ""OK"" come Dec. 1 but holiday season being half way over they slash price from $100 to $80 because they have tons of inventory.  What are looking at her is how much money did they make.  Note that marketing, advertising, legal (setting up contracts) are a bit fixed. In my opinion consumer sentiment is the #1 thing for a company that sells a product.  Incredible consumer sentiment is like millions of dollars in free advertising.  So let's say Dec. 15th comes and the reviews on the Superman Bike are through the roof.  Every loves it, no major defects.  Company can't even supply the retailers now because after slashing the price it became a great buy.  A common investor might be pissed that some dummy at the company slashed the prices so they could have had a much better profit margin, but at the same time it wouldn't have led to an onslaught of sales and consumer sentiment. And the last area is product sell-off.  This doesn't apply to all product but most.  Some products will only have a technology shelf life, some will actually go bad or out of fashion, and even selling Superman bikes you want to get those to the store because the product is so big.  So ignoring making a profit can a company sell off inventory at or around cost.  If they can't, even if they made a profit, their risk factor goes up. So let's get back to Superman Bikes.  This is the only product company ABC has.  They had expected holiday sales at 100 million and profits at 40 million.  They ended up at 120 million and 44 million.   Let's say their stock was $20 before any information was gathered by the public (remember for most companies info is gathered daily now so this is rather simplistic).  So you might expect that the stock would rise to maybe $24 - to which if you were an investor is a great profit. However this company has a cult consumer following who are waiting for the Captain America Bike (shoots discs) and the Hulk Bike (turns green when you go fast).  Let's say consumer sentiment and projections base off that put next holiday sales at $250 million.  So maybe the company is worth $40 a share now.  But consumer sentiment is funny because not only does it effect future projections but it also effects perceived present value of company - which may have the stock trading at $60 a share (think earnings and companies like Google).  Having a company people feel proud owning or thinking is cool is also a indicator or share worth. I gave you a really good example of a very successful company selling Superman Bikes... There are just as many companies that have the opposite happening.  Imagine missing sales goals by a few million with bad consumer feedback and all of a sudden your company goes from $20 to $5 a share." In short, thanks to the answers and comments posted so far.  No actual money is magically disappeared when the stock price goes down but the value is lost. The value changes of a stock is similar to the value changes of a house. The following is the long answer I came up with based on the previous answers and comments alone with my own understandings. Any experts who find any of the following is 200% out of place and wrong, feel free to edit it or make comments. Everything below only applies if the following are true: The stock price is only decreasing since the IPO because the company has been spending the money but not making profits after the IPO. The devaluation of the stock is not the result of any bad news related to the company but a direct translation of the money the company has lost by spending on whatever the company is doing. The actual money don’t just disappear into the thin air when the stock price goes down. All the money involved in trading this stock has already distributed to the sellers of this stock before the price went down.  There is no actual money that is literally disappeared, it was shifted from one hand to another, but again this already happened before the price went down.   For example, I bought some stocks for $100, then the price went down to $80. The $100 has already shifted from my hand to the seller before the price went down. I got the stock with less value, but the actual money $100 did not just go down to $80, it’s in the hand of the seller who sold the stock to me.  Now if I sell the stock to the same seller who sold the stock to me, then I lost $20, where did the $20 go? it went to the seller who sold the stock to me and then bought it back at a lower price. The seller ended up with the same amount of the stocks and the $20 from me. Did the seller made $20? Yes, but did the seller’s total assets increased? No, it’s still $100, $80 from the stocks, and $20 in cash. Did anyone made an extra $20? No. Although I did lost $20, but the total cash involved is still there, I have the $80 , the seller who sold the stock to me and then bought it back has the $20. The total cash value is still $100. Directly, I did lost $20 to the guy who sold me the stock when the stock has higher value and then bought it back at a lower price. But that guy did not increased his total assets by $20. The value of the stock is decreased, the total money $100 did not disappear, it ended up from one person holding it to 2 people holding it. I lost $20 and nobody gained $20, how is that possible? Assume the company of the stock never made any profit since it’s IPO, the company just keeps spending the money, to really track down where the $20 I lost is going, it is the company has indirectly spent that money. So who got that $20 I lost? It could be the company spent $20 for a birthday cake, the $20 went to the cake maker. The company never did anything to make that $20 back, so that $20 is lost. Again, assume the stock price only goes down after  its IPO, then buying this stock is similar to the buying a sport car example from JoeTaxpayer (in one of the answers), and buying an apple example from BrenBarn(in one of the comments from JoeTaxpayer’s answer).  Go back to the question, does the money disappears into the thin air when the value of the stock goes down? No, the money did not disappear, it switched hands. It went from the buyer of the stock to the company, and the company has spent that money. Then what happens when the stock price goes down because bad news about the company? I believe the actual money still did not just disappear. If the bad news turn out to be true that the company had indeed lost this much money, the money did not disappear, it’s been spent/lost by the company. If the bad news turn out to be false, the stock price will eventually go up again, the money is still in the hand of the company. As a summary, the money itself did not disappear no matter what happens, it just went from one wallet to another wallet in many different ways through the things people created that has a value. "4) Finally, do all companies reduce their stock price when they pay a dividend? Are they required to? There seems to be confusion behind this question.  A company does not set the price for their stock, so they can't ""reduce"" it either.  In fact, nobody sets ""the price"" for a stock. The price you see reported is simply the last price that the stock was traded at.  That trade was just one particular trade in a whole sequence of trades.  The price used for the trade is simply the price which the particular buyer and particular seller agreed to for that particular trade.  (No agreement, well then, no trade.)  There's no authority for the price other than the collection of all buyers and sellers. So what happens when Nokia declares a 55 cent dividend?  When they declare there is to be a dividend, they state the record date, which is the date which determines who will get the dividend: the owners of the shares on that date are the people who get the dividend payment.  The stock exchanges need to account for the payment so that investors know who gets it and who doesn't, so they set the ex dividend date, which is the date on which trades of the stock will first trade without the right to receive the dividend payment.  (Ex-dividend is usually about 2 days before record date.)  These dates are established well before they occur so all market participants can know exactly when this change in value will occur. When trading on ex dividend day begins, there is no authority to set a ""different"" price than the previous day's closing price.  What happens is that all (knowledgeable) market participants know that today Nokia is trading without the payment 55 cents that buyers the previous day get.  So what do they do?  They take that into consideration when they make an offer to buy stock, and probably end up offering a price that is about 55 cents less than they would have otherwise.  Similarly, sellers know they will be getting that 55 cents, so when they choose a price to offer their stock at, it will likely be about that much less than they would have asked for otherwise." Anti-Facebook circlejerk continues. Where were these articles before it went public ? It makes it seem like bad for common investors when in reality they couldn't even get in on the stock. It was the institutional funds and connected investors who bought the stock at 38. The common market actually was the one that didn't support the stock once it went public.   If anyone, it's the institutional funds that got screwed. No. Not directly. A company issues stock in order to raise capital for building its business. Once the initial shares are sold to the public, the company doesn't receive additional funds from future transactions of those shares of stock between the public.  However, the company could issue more shares at the new higher price to raise more capital. If a company is public, and they record a 2016 profit of 100mil. Say there is shareholder A and shareholder B who are both wealthy and own 25% each of the company. Say the remaining 50% of shares are owned by a number of funds/small time investors.   So 2016 profits are 100mil, lets say there is a dividend. Can the company still award a larger share of profits to the two big shareholders? I.e. say 50 mil of the profits go into dividend payments and another 20 mil as retained earnings to be reinvested into future projects, can the remaining 30 mil of profits be split and given to shareholders A and B? "In a rational market, the market caps (total value of all shares of the company) should be determined by the expected future profits of the company, plus the book value (that is the value of all assets that the company holds). The share price is then calculated as market caps divided by number of shares - a company worth a billion dollar could have a million shares at $1000 each or a billion shares at $1 each or anything in between.  When profits drop, every investor has to re-think what the expected future profits of the company are. If all the investors say ""I thought this company would make a billion profit in the next ten years, but based on the drop in profits I changed my mind and I think they will only make 500 million"", then the share price drops. On the other hand, if profits dropped because of some predictable event, then that drop was already priced into the share price. If the profits dropped less than expected, the share price might even go up.  You can see the opposite effect: Share price might be very high because everyone expects huge growth in profits over the next ten years. If profits grow less than expected, the share price will drop. Share price depends on predicted future profits, not on profits today."