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
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.
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