What Happens When a Shareholder Invests Cash in a Corporation?
A corporation issues shares of its stock to investors as a means to raise capital. The exchange of stock for cash results in a mutual benefit for both the shareholder and the business: the business gains the cash needed to fund operations and make financing and investment decisions, and the shareholder obtains ownership rights. These include the ability to vote on corporate decisions and to receive cash dividends declared by the board of directors.
When a shareholder contributes cash to a corporation in exchange for shares of its stock, he increases his ownership in the company. For example, if a company has 500,000 shares of common stock issued and outstanding and a shareholder with 14,000 shares purchases and additional 13,000 shares, the shareholder's ownership stake in the corporation increases from 2.8 to 5.4 percent.
The cash a corporation receives from a shareholder in exchange for shares of its stock results in an increase in the cash balance on the corporation's balance sheet. The corporation may use the cash to fund business growth and expand operations by purchasing new capital equipment for a new product line or to develop a new business segment. The cash may also be used to reduce the company's interest expense by paying off its long-term debt.
Shareholders are entitled to vote on matters impacting the business, including the election of new members to the board of shareholders, corporate acquisitions and the issuance of new shares of stock to investors. Each share of stock entitles the shareholder to one vote during the annual general meeting. When a shareholder increases his shares of stock owned, his voting rights increase in proportion to the additional shares.
The issuance of increased shares of stock to a corporation's shareholders results in an increase in contributed capital, a component of stockholders' equity on the corporation's balance sheet. The contributed capital balance is the amount invested in the business by its shareholders -- the amount at risk if the company should fail. If a corporation issues 1 million shares of common stock at $.20 per share to its existing shareholders, the transaction increases the shareholders' equity balance by $200,000.