Final answer:
Cash flow to stockholders refers to the total money flows from a company to its shareholders, mainly through dividends and capital gains when shares are sold for more than the purchase price. For instance, buying a share at $45 and selling at $60 results in a $15 capital gain for the investor. The company benefits from stock issuance by acquiring capital for expansion without directly benefitting from subsequent stock trades.
Step-by-step explanation:
Cash flow to stockholders is defined as the net amount of money that a company pays out to its shareholders. Primarily, cash flows to stockholders come in two ways: through dividends and through the sale of stock leading to capital gains. When a firm issues stock, it raises capital; however, consequent trading of these shares between investors does not directly provide capital to the company. Instead, investors receive a return on their investment primarily through dividends, which are direct payments made by the company to its shareholders, or through the appreciation of stock value, resulting in capital gains when they sell the stock at a higher price than the purchase price.
For example, if an investor purchases a share at $45 and later sells it at $60, the investor realizes a capital gain of $15. The company itself benefits from issuing stocks as it allows for raising financial capital crucial for expansion. However, the company has no financial gain from the secondary market trading. The company's board of directors may decide on issuing dividends if the firm is profitable.