A company sells stock to provide funding for business operations and future expansion. Investors who buy these stocks gain an ownership interest and have rights to future profits depending on the amount of shares they hold.
The business decision to sell company stocks or not is crucial because it affects the founders’ ownership percentages and their control of the company.
Businesses issue or sell stock to raise more capital than they can borrow. This source of funding gives companies the opportunity to avoid interest payments associated with outside funding.
Selling stocks also provides advantages, such as risk diversification for its owners, the establishment of a firm’s value in the marketplace, increased managerial flexibility due to greater liquidity, and improved financial leverage especially if the company is in debt.
More advantageous aspects of selling stock include that the companies do not have any obligation to pay back the amount invested to purchase the stock and that they are not required to pay dividends every period.
Selling company stock is also referred to as equity financing because this type of funding allows investors the opportunity to gain an equitable interest in the company.