How do stocks and bonds benefit businesses?


I understand how they potentially benefit the individuals who buy them, but what do companies get out of selling them besides a little money just selling them?

In: Economics

Not a little money, a lot of money. Businesses sell stock to create a huge infusion of cash—potentially billions of dollars. If you start a successful company, you can pay yourself a good salary and then hope that when you’re ready to retire the business can be sold to someone else. If you take the company public, you cash-out part of the value that you have created right away. That cash can then go into the founders’ pockets, be put back into the company to grow it more, or be used by founders to start a new company.

Lots of money. The companies get LOTS of money. An IPO can generate billions in cash for a company. Bonds of any amount can be issued. Companies use the cash for lots of reasons – growth, acquisitions, etc. But the benefit to the companies is cash, and lots of it. Google “biggest IPOs” to see just how much money has been raised

u/demanbmore and u/ooobs are both right. What I would add is more philosophical and fundamental: stocks benefit businesses in the ways they described, but, in a very real sense, stocks *define* business. The whole idea of a “company” is that a group of people can pool their resources to engage in an endeavor that no single individual can afford on his own. That’s why it’s called a “company”. Stocks are the mechanism by which those individuals pool their resources.

A bond is basically a loan. So if you were to buy a company bond for $100, you’re giving the company a $100 loan that they promise to pay back in a certain time, with interest. For example, the bond may “mature” in 2 years and be worth $120, which the company will pay you.

For stocks, there are two big advantages –

First, the company can raise a lot of money. In essence it’s splitting itself up into millions of pieces and selling each piece.

Second, it creates “liquidity” for the founders and investors of a company. Let’s say you own a company worth $1 million. That’s a lot of money. But if if you want to buy a new car, you can’t simply tell the dealership that you have a company that’s worth a lot of money. They want cash. Sure, you may get paid a salary, but that’ll only get you so much. You don’t want to sell your entire company either.

What you could do though, is dice the company up into several parts. Let’s say you split it up into 10 shares, each worth $100,000 (to keep the example simple, we’ll pretend you still own 100% if the company). Now you don’t have to sell the company to get cash. You could just sell 1 share and get $100,000 in cash, while still owning 90% of the company. Going public and selling shares is one of the most popular “exit strategies” for investors (the other being selling the company to a much larger company).

Hopefully this makes sense.

You sell stock to raise money to grow your company.

Stock is ownership in a company.

So you offer stock to others, they buy the stock and now you have money you did not have before. The tradeoff is you may have owned 100% of your company and after selling stock you no longer own 100% and must answer to your stock holders.

A famous example of this is when Steve Jobs was fired from Apple. He started the company but was fired because he did not own a majority stake in the company (they re-hired him several years later).

So, why did Jobs sell all that stock and lose control? Because in order to build computer he needed many millions of dollars and the only way to get that in short order was to sell shares in the company. A few million people throwing a few hundred dollars at him means hundred of millions of dollars to ramp up production.

a bond is a simple credit. The company needs cash for various reasons (most often to invest into their business operations) and pays it back on a defined schedule.

A stock is selling ownership of the company. There are many reasons, previous owners want to retire, or they are looking for investors.

Something to add here is that the buying and selling of stock we most commonly see on TV is all done in the secondary market. So a stock “price” going up doesnt benefit the company directly, outside of the initial selling of shares, called an Initial Public Offering, IPO.

However, stock prices going up will benefit the owners of the company greatly, because they now have a more valuable company on paper. And if they needed more cash for themselves, they can sell their shares to generate funds. However, there are restrictions on selling these shares if you’re an insider at the company, and you can only sell through whats called a rule 144 sale.

Say you start a tire company with $50. A tire costs you $50 and you can sell it for $55. After your first tire is sold, you have $5 profit plus your original $50. So you go out and buy another one to sell. At this rate, you have to buy and sell 10 tires before you have enough money to buy two at a time. This is an inefficient way to grow your company. So, you issue bonds or stocks to have an upfront infusion of cash. Say you sell $1000 of bonds. You can stock your store with 20 tires instead of just one! You just have to pay back the bondholders with their bond coupon and the principle amount when the bonds mature. If you issue $1000 of stock, there’s nothing required to pay back to the stockholders. The resale price of the stock should theoretically grow at a rate similar to that of your company, and if it doesn’t, the unsatisfied stockholders can sell their shares to other investors in the marketplace through a stock exchange at a discounted price that reflects how your company has actually performed.

Both the issuance of bonds and shares raise new money for a company, and they can use this new cash injection to expand, and generate more value for the owners of the business (shareholders) in the future.

If a company raises cash via the bond market, they have to pay this back at some point. This is the company simply taking a loan, but instead of using a bank, they borrow money from investors.

If they raise cash through stock issuance, they do not have to pay the money back (obvious benefit over the issuance of bonds), but they have to give up some control of the company, as each holder of a new share also has voting power. Overall voting power of existing shares (prior to issuance, probably when the company is still Private) will be diluted. Then new shares are also entitled to share in the profits of the company, also causing a dilutive effect for existing shareholders.

When shares are offered to the market, existing shareholders typically have the right to buy new shares, in proportion to their existing holdings, before they are offered to the general market, thereby avoiding dilution of profit and voting power.

Those are the basic reasons, however I would recommend reading Investopedia for more information.

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