Companies issue stock when they go public. The decision to switch from a private to a public company is a difficult one and it's not an easy feat to achieve, but it can have several advantages for a business. When a company makes the transition from private to public, it has an IPO or initial public offering. This allows the public to buy shares of the company in the form of stocks. Down the line, the company might decide to issue more shares of stock.
What Is the Primary Reason to Issue Stock?
A company typically goes public and issues stock in order to raise money that it can use to expand the business. For example, the money earned from the IPO could be used to build a new factory or hire more employees with the goal of making the company more profitable. Other reasons include raising funds to develop new products, buy equipment and decrease the company's debt.
Why Don't All Companies Issue Stock?
With the promise of increased earnings from an IPO, you might wonder why every company doesn't go public and issue stock. Well, there are some definite downsides. There is a lot of responsibility that comes with having a public company including making sure your business complies with all of the federal and state regulations that affect publicly traded companies. You are also required to make all of your earnings and other company information available to anyone who wants to take a look. This can be difficult for private companies that like keeping their financial information away from public scrutiny. As a public company, you are now also beholden to investors who want your stock to make them money.
How Can Investors Receive Compounding Returns?
Investors who buy stock in your company want returns on that investment. Compounding returns are typically what investors are looking for. This refers to the rate of return that represents the cumulative effect of gains or losses over a period of time. For example, consider a company whose stock produced a 10-percent annual compound return over the past five years. At the end of its fifth year, the stock's capital would have grown to be the equivalent to earning 10 percent during each of the five years.
If the business does well and continues to grow, investors should expect compound returns.
What Is the Difference Between Stocks and Bonds?
When you invest in a company, you are buying stock or a share of an actual business. When the business does well, the price of your stock increases. When it does poorly, the price of your stock goes down.
Bonds are different than stocks. They represent debt. When you purchase a bond, you are loaning money to an entity, such as a corporation or government. The entity borrows the funds for a defined period of time at a variable or fixed interest rate. If you own a bond, you essentially are a creditor to whoever is using that money.
Stocks have the potential to earn much greater returns, but bonds are more secure and offer a smaller but more reliable interest rate.