What Are Stocks For?
While many investors put money into the stock market, some never stop to think about what they are actually investing in. Stocks are not simply numbers on a screen or pieces of paper; they represent a piece of ownership in a company. Companies issue stocks as a way to raise money for business purposes.
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Why Stocks Are Issued
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Companies issue stock as a way to generate income for the business. When a company needs to expand, it can borrow the money from a lender, or it can issue stock. When a company issues stock, investors buy the stock and the company gets to use the money as it needs to. The company then shares a portion of the future profits that are earned over the course of normal business operations. Investors are rewarded for their investment with dividend payments and capital appreciation in the stock.
Benefits of Issuing Stock
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One of the primary benefits of issuing stock is that it does not require the company to pay the money back. By comparison, if the company were to borrow the money it needed from a commercial lender, the money would have to be paid back with interest. Although the company will have to pay the investors back in the form of dividends, no regular loan payments are required. Another advantage of issuing stock is that it allows company owners to keep enough of the shares that they can still retain control.
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Bringing on Owners
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One of the potential issues with issuing stock is that the company is essentially bringing on more owners. Anyone who owns a share of stock in the company is now a partial owner in the company. When the company has an important matter to figure out, the investors in the company vote to help make a decision. This dilutes the ownership in the company and can make it difficult to make any decisions in a timely manner.
Types of Stock Issued
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Companies can issue different types of stock to investors. One type of stock that a company can issue is preferred stock. With this type, investors receive regular, fixed dividend payments in much the same way that bondholders receive interest. Preferred stockholders do not get voting rights, but they do have a high priority to claim assets if the company goes under. Common stock is another type of stock that can be issued. Common stockholders receive voting rights, and are eligible to receive dividend payments when the company elects to issue them.
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