Friday, July 11, 2008

Need for declaring public offers or shares by a company

"Share" - This has been a buzz word with many people for the past 15 years or so. What is this share? Why do companies offer share?

Share or stock as called popularly is a share in the ownership of a company (its assets). This means, "one who holds stock of a company is one among the others owners who are owning shares or stocks of the company".

Obviously, the owners should also get proportionately, the profits that the company makes. Yes, this is given in the form of dividends. This can be compared to the interest that a depositor gets when he invests some amount in a financial organisation.

Why do the companies offer shares?

Well, the company requires money to run its operation. There are many ways a company will get money. Either through its earnings by the sale of its products or service or by getting loan from bank or by getting money from the public.

Getting loan from banks is called as debt financing.

Getting money from public is called as equity financing.

But will the public give money without getting or expecting anything in return? The answer is a clear NO. So as a reward, the company offers ownership to all who had come forward to offer money. The degree of ownership offered to a person or even another company is directly proportional to the amount invested by the investor.

It is important that the distinction between a company financing through debt and financing through equity is well understood.
When we buy a debt investment such as a bond, we are guaranteed the return of our money (the principal) along with promised interest payments.

This isn't the case with an equity investment.
By becoming an owner, we also need to accept the risk of the company not being successful.
Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

1 comment:

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