The issuance of stock certificates is a means for a company to exchange ownership in the business for the money it needs to pursue a certain strategy or operate the company in a specific way in hopes of increasing its revenue stream. Only then does the value of a company and the wealth of its owners increase.
Why Seek Additional Funding?
Businesses issue stock to raise money for a variety of reasons. For instance, a company incurs additional costs when it expands operations, hires additional people and develops new products. Issuing stock is a means to get the money needed to take these actions, each of which provides an opportunity for the company to grow and earn more money in the future. Other than issuing securities, or equity financing, a company has but one other way to get the cash it needs to pay its costs or expand the business, namely, debt financing.
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The Benefits of Issuing Stock
Issuing stock, rather than borrowing cash, can avoid the need to pay interest on debt. Also, when issuing stock, the company and the government set the parameters of the fundraising ploy.
Also, when a company issues stock, it has no obligation to pay interest on the amount of cash it raises. In fact, the company is under no obligation to repay the investors for the cash they contribute.
What's more, equity financing gives a company and the shareholders a risk-sharing opportunity. Because an increase in equity typically involves an increase in the number of a company's shareholders, the personal financial risk of the founders is less and that continues to decrease as the pool of investors grows.
A share of stock represents a partial ownership of a business. So, when you acquire stock, you have acquired the right to a portion of the company's assets, such as equipment and intellectual property, as well as a portion of its earnings.
Once you purchase shares of stock, you receive a stock certificate as evidence of your ownership of a portion of the capital, land or property of the named company. Your rights in the company that accompany the certificate, including a say in how the company is operated, are transferrable with the ownership of the document. As the stock is bought and sold, the rights pass.
What Is a Public Offering?
Shares are offered for sale to the public on a stock exchange. The issuing company works with an investment banker to set the initial asking price per share and the total number of shares of stock it will offer when it "goes public."
The asking price does not necessarily correlate to the market value of the company's assets nor does it depend on a company's profitability. Instead, the price often reflects a company's expected or anticipated future value. For instance, Amazon made its initial public offering on the NASDAQ on May 15, 1997, at a price of $18 per share.
What Is a Stock Exchange?
A stock market is a market at which the stocks of publicly traded companies are bought and sold. The market's activities can be conducted in person, by using a broker or online.
The three major stock exchanges in the United States are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers (NASDAQ.)