Why Do Corporations Sell Stock: Everything You Need to Know
Reasons why corporations sell stock include raising capital, developing a new product, growing a business, and paying off debt.3 min read
“Why do corporations sell stock?” is a common question from novice investors and entrepreneurs. Reasons why corporations sell stock include raising capital, developing a new product, growing a business, and paying off debt.
What Is a Stock?
A stock is a share of ownership in a company and serves as a claim on the company's earnings. The more stock a person owns, the greater their share of ownership in the company.
However, stocks are often more complicated than the basic definition. Stockholders own shares sold by the corporation. They do not actually own the corporation. A corporation is unique because the law considers it to be a legal person. That means that unlike other types of business structures, a corporation can borrow money, own property, file taxes, get sued, and much more. A corporation also owns its own assets; they are not owned by the stockholders.
Separation of Corporation and Stockholders
It is important to clarify the difference between a corporation and its stockholders because corporate property is separate from stockholder property, which means both parties have limited liability. If a corporation were to go bankrupt, a judge could rule that the corporation has to sell all of its assets. Under the separation of business and stockholders, personal assets aren't at risk of being sold. Although the value of the stocks may drop dramatically, the judge can't order stockholders to sell their shares of the company.
The same is true if a stockholder goes bankrupt. That person can't sell the corporation's assets to get out of his or her personal debt. The corporation owns the assets, and the shareholders are given shares by the corporation. A person who owns 25 percent of the shares of a company doesn't actually own a quarter of the company; he or she owns 100 percent of a quarter of the company's shares.
Although a shareholder owns stock issued by the corporation, they can't do whatever they want with the company or its assets. A stockholder can't walk into the corporation's office and take paperwork or a computer because they own part of the company. The corporation, not the shareholder, owns the computer. This is known as separation of ownership and control.
Owning shares comes with a number of rights and responsibilities. Shareholders have the right to do things like:
- Vote in shareholder meetings
- Receive dividends, or company profits
- Sell their shares to someone else
A shareholder who owns a majority of shares has increased voting power and can indirectly control a corporation by appointing the board of directors. This is very evident when one corporation purchases another company. The company that acquires the other doesn't actually buy the building and the assets but instead buys up all the shares.
The board of directors is one of the most important parts of an organization. It is responsible for growing the corporation and adding value. One of its main responsibilities is hiring officers, such as the CEO.
How Shareholders Earn Money
Most shareholders don't expect to manage the day-to-day operations of a corporation. Their focus is on getting a portion of the company's earnings. The value of a stock is closely linked to a company's profits. The more shares a person owns, the greater the percentage of the profits they receive.
However, instead of paying dividends to their shareholders, some companies reinvest their profits to keep growing the company. Although shareholders aren't actually getting a payout in that situation, the earnings are reflected in a higher stock value and price.
Types of Stocks
Companies issue stocks, which are also known as equity or equities, to raise money to expand the business or create new products. Shareholders can either buy stocks directly from the company, which is called the primary market, or from another shareholder, which is known as the secondary market.
Aside from stocks, companies can also raise capital through bank loans or by issuing bonds. Bonds are very different from stocks. The major difference is that bonds are a form of debt, which means that bondholders are creditors to the corporation. They are owed interest and the principal they paid for the bond.
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