How do stocks and bonds benefit businesses?

821 views
0

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

Not a little money, a lot of money. Businesses sell stock to create a huge infusion of cash—potentially billions of dollars. If you start a successful company, you can pay yourself a good salary and then hope that when you’re ready to retire the business can be sold to someone else. If you take the company public, you cash-out part of the value that you have created right away. That cash can then go into the founders’ pockets, be put back into the company to grow it more, or be used by founders to start a new company.

Lots of money. The companies get LOTS of money. An IPO can generate billions in cash for a company. Bonds of any amount can be issued. Companies use the cash for lots of reasons – growth, acquisitions, etc. But the benefit to the companies is cash, and lots of it. Google “biggest IPOs” to see just how much money has been raised

u/demanbmore and u/ooobs are both right. What I would add is more philosophical and fundamental: stocks benefit businesses in the ways they described, but, in a very real sense, stocks *define* business. The whole idea of a “company” is that a group of people can pool their resources to engage in an endeavor that no single individual can afford on his own. That’s why it’s called a “company”. Stocks are the mechanism by which those individuals pool their resources.

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.

You sell stock to raise money to grow your company.

Stock is ownership in a company.

So you offer stock to others, they buy the stock and now you have money you did not have before. The tradeoff is you may have owned 100% of your company and after selling stock you no longer own 100% and must answer to your stock holders.

A famous example of this is when Steve Jobs was fired from Apple. He started the company but was fired because he did not own a majority stake in the company (they re-hired him several years later).

So, why did Jobs sell all that stock and lose control? Because in order to build computer he needed many millions of dollars and the only way to get that in short order was to sell shares in the company. A few million people throwing a few hundred dollars at him means hundred of millions of dollars to ramp up production.