From the shareholders’ perspective, they make a one-time purchase that can potentially make them massive profit with minimal effort on their part, but for the company, isn’t that like taking out a high-interest loan that they can never pay off? Wouldn’t an actual loan be better if they just need money?
In: Economics
See as how this is the ELI5 subreddit, I will try to use simpler terms than the very thorough and detailed explanations that others have posted.
In essence selling stocks is a way to raise capital other than through selling products. For many startups, stocks may as well be their main product, since their real products might not be viable/competitive/turning a profit yet. Stocks are in the end just a piece of paper that promises a pay-out at a later date *if* the line goes up. If prices plummet and stockholders are left holding the bag then tough cookie. But investors dreaming of cashing out and so there will always be enough money rolling in through stocks. This is one of the unavoidable and likely necessary inventions of the capital market.
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