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
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.
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