When I need money (over and above my pay check),
I have two main choices.
I can borrow the money from the bank (or my buddy Guido, the killer pimp) and pay interest
Or
I can sell off some stuff I have laying around.
When companies need money (over and above their earnings),
they also have two common choices.
They can borrow money from the bank (or other people, yes, I know, bankers are people too) and pay interest
or
they can sell off pieces of ownership (issue shares) and share the company’s future profits.
This first selling of shares is called an initial public offering or IPO. That is the issuing of shares that everyone hears about, where owners can get rich and throw wild parties.
There can be subsequent quieter issuing of shares (often when companies need mucho money like when…I don’t know, they’re buying other companies).
Then what?
After I sell my velvet Elvis at a yard sale, I don’t really care what the new owners do with it. If they sell it for more to someone else, I don’t care (as long as it doesn’t show up on Antiques Roadshow valued at millions of dollars, that would make me cry). If they sell it for less to someone else, I don’t care. I don’t even care if the new owners throw it in the dumpster (as long as I don’t hear about it).
The company feels the same way.
Once shares have been sold that first time, the company gets no more money. If shareholders want to sell those shares to someone else on the stock market, the company gets no more money. If the price of the shares climb sky high, the company gets no more money. On the other hand, if the price of the shares drop dramatically during one of those crashes everyone worries about, the company doesn’t lose money.
The company’s key responsibility is to try to make money for their owners (the shareholders), whoever those owners are at the time. The company will pay out this money now or in the future (sometimes distant future) through dividends.
Comments (4)
Just remember, dollface, that borrowing cash will keep you from getting ahead, since you're always making payments to the bank instead of to yourself. Stick to a budget and you won't run short of money, baby.
Posted by DEBTective | September 12, 2006 2:05 PM
Posted on September 12, 2006 14:05
Great point DEBTective (love the site btw).
I only borrow for investment purposes. Have no consumer debt and no mortgage (the HELOC is invested, scooping the favorable spread). I reco leveraged investing only when people are VERY comfortable with the cash flow.
Posted by Kimber | September 12, 2006 3:41 PM
Posted on September 12, 2006 15:41
This is a great overview of IPOs and the stock market.
I enjoyed this post.
The SEC has been pushing companies to write financial documents in plain (but insightful) English.
Corporate America should read this post and take notes.
Posted by Frugal Duchess | September 12, 2006 5:12 PM
Posted on September 12, 2006 17:12
Thanks Sharon!
One of the common worries I hear is that if the stock market crashes, the company itself will go out of business.
As you know, the company doesn't really care (except for the whole ego thing). They got their financing already.
So the company will still do business, will still sell product, will still pay out a share of their earnings (dividends).
Takes some of the fear out of crashes.
Posted by Kimber | September 12, 2006 10:24 PM
Posted on September 12, 2006 22:24