Stocks for beginners: Why companies sell shares

Julie Brownlee, Fsp Invest, 24 Apr. 2014

Tags: stocks for beginners, stocks, shares, sell shares, goes public, difference between stocks and shares, listed company, listed companies, stock market, stock exchange,

All the stock markets around the world are host to thousands of companies that sell their shares to the public and institutional investors. So why do companies bother selling shares? What are the advantages to listing on a stock exchange? Let’s take a closer look…

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What’s the difference between stocks and shares?

The words stocks and shares mean the same thing. Stocks are shares in a listed company. To put it another way, when you buy shares, you’re buying a share in the equity of that listed company.

Companies sell shares to raise money, Shan Gilani in Money Morning US explains. They sell these shares to investors and the public.

So how does it all work?

Let’s use well-known social media site Facebook as an example.

Before Facebook had a listing on the stock market, the only way it could raise money was by selling ownership interests privately. It had to approach venture capitalists and other investors.

As Facebook grew, its founders, partners and investors want to raise more money to expand the business further. It wanted to open up the number of people who could own their own slice of Facebook.

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When a company ‘goes public’

To do this, they needed to offer shares to the public and institutional investors. By going public a company has to adhere to the strict regulations of the stock market where it has a listing. And it has to reveal all of its financial information.

By going public, the founders and the original investors get a portion of the shares. This means that should they want to cash in their investment, they just have to sell their shares on the stock market. They can even choose to sell all of their shares.

And when a company goes public it doesn’t have to sell all of its equity. It might choose to only sell 20% for instance. The original owners, investors and employees retain the rest of the equity.

There are restrictions on when these people can sell their stock. This is all to do with the laws governing insider trading. So whenever there are events going on that can affect the share price, they can’t sell.

This includes the weeks coming up to the release of results. If you work for the company, you’re more likely to know what’s going on in the company than the public will.

So there you have it, why companies sell shares.

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