Although selling stock dilutes a company's ownership, it raises money without subjecting owners to repayments or draining future cash flow.3 min read updated on February 01, 2023
Why do most companies sell shares of stock? Although selling stock dilutes a company's ownership, it raises money without subjecting owners to repayments or draining future cash flow. Selling stock and borrowing money have pros and cons, so whether you decide to sell company stock depends on your business goals.
What Are Stocks?
The stock market is an intimidating subject for many. You either hear stories of investors striking it rich or losing it all, which can skew an average investor's perceptions. Fortunately, the stock market isn't as scary as you might think, and, in many cases, it proves to be a viable investment for business owners.
Buying a stock means buying a piece of a company, so if you need to raise funds for your corporation, you issue stock shares and allow investors to purchase them. This process occurs through an initial public offering where the share price is set depending on the company's worth and how many shares it plans to issue.
Once a company sells stocks, it keeps the money raised to operate and grow the business while the stocks are traded on the New York Stock Exchange (NYSE). The NYSE is where investors and traders can buy and sell shares of stock, but the company no longer receives proceeds from sales beyond the initial public offering.
Why Should Someone Buy Stock?
Since the perceived value of a company changes over time, investors will continue to buy and sell stock after the initial public offering. They will either lose or make money depending on how the market fluctuates. This fluctuation occurs based on how many traders and investors buy or sell stocks, which can push the price of a said stock up or down.
It's very difficult to predict which way the stock market will go, but since stocks tend to rise overall, many investors purchase a variety of stocks so that they can hold onto them long-term. This method is called “diversification,” and those who use it are generally not concerned with day-to-day fluctuates in stock prices.
Ultimately, you want to purchase stocks from companies you expect to succeed and rise in value. Purchasing shares in a company also gives you voting rights in how that company is run. Depending on the class of shares, you might obtain voting rights equal to however many shares you've purchased. As a shareholder, you can participate in voting in a board of directors or on making major company decisions.
Why Do Companies Sell Their Stock?
Companies opt to sell stock for a number of reasons. The main reason is financial leverage.
Banks and other traditional lenders typically won't provide loans to new companies, which is why startups need to seek out angel investors and venture capitalists. After exhausting all finances from those initial investors, it's a good idea to approach investment bankers regarding selling shares of stock to the public. Companies can then use this financial leverage to further their business goals.
Corporations may also sell stock for speculative reasons. When stocks are sold below the company's valuation, the company can purchase its own shares for a more affordable price and sell them at a higher rate, gaining a short-term profit.
In some cases, primary shareholders in the corporation may want to sell their shares during distress.
Other situations that may call for a company selling stock include:
- Generating cash from private placement, which allows management to choose who the stockholders are
- Attracting investors who can bring their own expertise to the company
- Owners, venture capitalists, and initial investors want to recoup their financial contributions to the company
- The owners may see prestige that comes with publicly traded companies
- To raise money for an expansion
- To attract traditional lenders who are more likely to extend credit to publicly traded companies
- To purchase other firms through stock shares instead of money
Does a Company's Stock Price Matter?
Publicly traded companies use stock prices as a barometer of health. When the stock price is up, the company is in a strong economic position. When the prices decline, there might be an issue with the company's reputation or consumer trust. In general, the higher a company's stock price, the more optimistic the company's prospects.
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FAQs
Why do most companies sell shares of stock? The main reason why most companies sell shares of stock is to raise money for the company. For a certain sum, an investor can buy stock in the company, thus granting them ownership rights in it. With this, investors can participate in the company's growth and profit.
What is the point of selling shares? ›
Selling a stock to shift the money into other investments can help achieve improved long-term gains. For example, if a stock or sector is underperforming, an investor can reallocate the funds to other better-performing areas of the market.
Why are big companies selling stocks? ›
Generating cash from private placement, which allows management to choose who the stockholders are. Attracting investors who can bring their own expertise to the company. Owners, venture capitalists, and initial investors want to recoup their financial contributions to the company.
What does it mean when a company sells its shares? ›
In a sale of shares, the company's shareholders sell the shares entitling ownership of the company to the buyer. The shareholders get the sales price themselves. Through the transaction, all the rights and responsibilities attached to the ownership of shares, such as debts and liabilities, are transferred to the buyer.
Why do companies sell common stock? ›
Why do companies issue common stock? By issuing stock, a company increases its equity, thereby reducing its reliance on debt. A company issues its first stock during the initial public offering, IPO, which indicates that it is growing and is ready for investor capital.
Why would a company want to sell shares? ›
There are many valid reasons to sell all or part of a business. Selling shares in a business can generate significant cash, which can be used to pay down debts or fund investments or charitable donations. Likewise, selling part of a business can reduce the owner's risk and allow them to diversify their personal assets.
What is the downside of selling shares? ›
One of the primary disadvantages of selling shares is the potential loss of control for existing shareholders, especially if you sell a significant portion of ownership to external investors. New shareholders may have differing opinions on business strategies and decision-making, which could lead to conflicts.
Why are billionaires selling all their stocks? ›
"Billionaire CEOs like [Jeff] Bezos, [Mark] Zuckerberg, Jamie Dimon, and the Walton family are selling off massive amounts of their own stocks, and analysts think the CEOS may be bracing for an economic downturn," he said, adding, “An overheated stock market continues to climb to new heights as investors feed that ...
What is the 3-5-7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
Who sets the price of a share of stock? ›
Once a company goes public and its shares start trading on a stock exchange, its share price is determined by supply and demand in the market. If there is a high demand for its shares, the price will increase.
When you sell your stocks the buyer pays the money; when you buy the stocks the money you paid goes to the seller. The transactions are handled by stock brokers.
Who gets the money when a company sells shares? ›
Do shareholders receive payment during a company sale? Yes, shareholders typically receive payment during a company sale. The agreed sale price is usually a combination of cash, shares in the acquiring company, or both, and every shareholder gets their portion according to their stake in the company.
Where do people most commonly go to buy stock? ›
Most people will want to use an online broker to buy and sell stocks.
What are the disadvantages of shares? ›
There are also some potential drawbacks to issuing shares:
- diluted ownership.
- reduced control of your business.
- loss of privacy.
- administration costs.
- you may have to offer a monthly or quarterly dividend to investors.
- you may require the services of a solicitor or accountant.
Definition: 'Stock' represents the holder's part-ownership in one or several companies, while 'share' refers to a single unit of ownership in a company. For example, if X invests in stocks, it means that X has a portfolio of shares across different companies.
Why do all companies sell stock? ›
The main reason why most companies sell shares of stock is to raise money for the company. For a certain sum, an investor can buy stock in the company, thus granting them ownership rights in it. With this, investors can participate in the company's growth and profit.
At what point do you sell shares? ›
Occasionally, markets can get overly optimistic about the future prospects for a business, bidding its stock price to unsustainable levels. When the price of a stock reaches a level that cannot be justified by even the best estimates of future business performance, it could be a good time to sell your shares.
Do you make money from selling shares? ›
The way you make money from stocks is by the selling them at a higher price than you bought them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).
What is the benefit of selling stock? ›
Cashing Out or Change in Lifestyle. An investor will often rebalance a portfolio by selling a stock that has significant gains and outweighs the rest of the portfolio. An investor might wish to sell a stock to book a loss for tax purposes or cash out to deploy in a competing investment, such as real estate.
Why are the rich selling their stocks? ›
The reason behind this move is to secure their wealth amidst rising interest rates and economic uncertainty. Similar issues are still ongoing to this day. These wealthy investors are shifting from a focus on asset growth to wealth preservation in order to protect their assets.
