Anyone can buy stocks. All you have to do is talk to an investment professional, and you can be a stockholder in short order. But those who have never invested in the stock market may be hesitant to do so.
One of the biggest reasons people are unwilling to invest in stocks is because they simply don’t understand them. After all, the ability to buy a certificate and be entitled to a portion of the issuing company’s profits does sound a little too good to be true. But there is plenty of logic behind the concept.
Shares are, quite simply, pieces of ownership in a company. It’s up to the company how the initial shares are distributed. They may be sold to a select group in an effort to maintain as much control as possible over the company. Or they may be sold on the stock market, making it possible for anyone to buy them.
But why would a business want to sell off pieces of its ownership? In most cases, it is done to raise capital quickly. When a business needs to obtain assets, it is usually faced with a choice of saving the money to get them, borrowing money, or selling stock. Borrowing requires repayment of principal plus interest. Saving the money needed may take a long time. Selling shares is quick, and there is no need to repay the money received.
The issuing of shares also offers other benefits for the company. It provides an avenue for founders to cash in on their investments and move on to other ones. It provides a way for the company to gain notoriety. And some companies issue shares as a way of providing incentives for employees.
Some businesses sell off all ownership in shares, but many retain some of the stock to keep some control of the company. They may issue only part of their stock in their initial public offering (IPO), then issue more shares at a later date. This gives them a means of gaining additional capital when it is needed. They could also issue new shares, but this dilutes the value of both new and existing ones.
There are also plenty of benefits for shareholders. Holders of common stock receive voting rights at shareholders meetings, allowing them to have a say in how the company is run. Stockholders are also entitled to dividends in consideration for their investment. Dividend amounts are determined by how much profit the company makes, and they are divided equally among shares.
The issuing of shares is a win-win situation for the company and its future shareholders. The company gets the capital it needs to grow, and shareholders get the opportunity to reap a portion of the profits.
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