Why Do Companies Issue Stock?
Companies throughout the world issue new stock shares every day. But what is stock, and why
does a company issue it? To help you to better understand these important concepts in this
tutorial we will discuss:
What is Capital?
Equity vs. Debt
Why Do Corporations Issue Stock?
Advantages for Stock Holders
Let us begin by defining the word capital.
What Is Capital?
Let's imagine that you decide to start up your own ice cream shop business. You will need to
invest in equipment, food supplies and property. All the money that you invest to start your
business is called capital. Essentially, the capital of a business consists of all of its assets (or
items to assist in the creation of wealth).
What if it dawns on you that you don't have enough cash to buy all the needed assets? Let's see
how new businesses and companies deal with this problem.
Equity vs. Debt
To start a new business (or fund a new project) a company can raise money in two ways - by
selling shares of equity or by incurring debt. If the owner of our ice cream parlor invested all their
own savings to buy the materials necessary to start the business, they made an equity
investment in the company. Equity is simply ownership of a corporation. Typically, ownership
units in a corporation are referred to as stock.
However, if our owner did not have necessary funds to start their own business they could
finance their operation in one of two ways:
1. Issue stock (or certificates of partial ownership in his company) to people who may be
interested in helping their venture out in return for a proportional share of the profits that
the company might generate.
2. Borrow money that will need to be paid back with interest.
