By: Dividend Sensei
The stock market was created so that companies could raise money from investors to fund future growth. They did so via initial public offerings or IPOs. This is when companies actually sell a piece of their company to investors, who are then entitled to a share of their future profits and cash flows. When you buy shares on one of the numerous stock markets around the world you are not providing funding to companies but rather exchanging ownership stakes with other investors. But that doesn’t mean that the stock market doesn’t serve a crucial purpose.
That’s because this secondary market provides the liquidity that makes stocks attractive in the first place. In other words having a place where you can quickly, easily, and cheaply convert money into shares, and vice versa, is incredibly valuable to society. For one thing it allows regular investors like us to convert our variable active income (that we have to work for), into a stream of passive wealth. For dividend stocks this means that we’re literally getting a slice of those corporate profits and free cash flow paid to us on a quarterly, or even sometimes monthly basis.