As you know, a share of a stock represents the ownership of that company. But why would the founders of a company want to share the profits when they could potentially keep it all for themselves? The answer to this question is that every company needs money. It is very costly to start up a major business and there are limited ways in which a company can raise money. They can either borrow money from someone else (usually the bank) or they can sell part of the company to individuals which is known as issuing stock. This is highly beneficial to the company because they don’t have to pay back anyone or make interest payments along the way.
The only downside to the company is that in order to raise this money they are selling ownership of the company and its profits. The hope that the stock holders have is that someday their shares will be worth more than what they bought them for. There is a risk when buying stock because there is no guarantee that you will make money off of your investment. When a private company issues stock for the first time it is known as an Initial Public Offering (IPO). Any company that sells stock is then known as a corporation.
Not all companies sell stock. You won’t be able to find the local restaurant in your small town trading on the NASQAD anytime soon. Companies do this for a number of reasons. An example is that the company just doesn’t need any extra money to start-up. The owner of the local restaurant is able to finance all the start-up costs – staff, building rent, utilities, bills, etc. – all by himself. However, if he wanted to expand his restaurant into a major franchise – i.e. McDonald’s – then the owner would need a lot of money and would have to convince people to buy the stock by proving to the public that his business will be successful. This is very important because no one will invest in a company deemed to fail.
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