Business is the cornerstone of any economy. Almost every large corporation
started out as a small, mom-and-pop operation and through growth, became
financial giants. Wal-Mart, Dell Computer, and McDonald’s had combined
profits of $10.34 billion this year. Wal-Mart was originally a
single-store business in Arkansas. Dell computer began with Michael Dell
selling computers out of his college dorm room. McDonald’s was once a
small restaurant no one had heard of. How did these small companies grow
from tiny, hometown enterprises to three of the largest businesses in the
American economy? They raised capital by selling stock in themselves.
When a company is growing, the biggest hurdle is often raising enough money
to expand. Owners generally have two options to overcome this. They can either
borrow the money from a bank or venture capitalist, or sell part of the business
to investors and use the money to fund growth. Taking out a loan is common, and
very useful – to a point. Banks will not always lend money to companies, and
over-eager managers may try to borrow too much initially, wrecking the balance
sheet. Factors such as these often provoke owners of small businesses to issue
stock. In exchange for giving up a tiny fraction of control, they are given
cash to expand the business. In addition to money that doesn’t have to be paid
back, “going public” [as its called when a company sells stock in itself for the
first time], gives the business managers and owners a new tool: instead of
paying cash for an acquisition, they can use their own stock.
To better understand how issuing stock works, let’s look at a fictional
company “ABC Furniture, Inc.”
Next page > An example of
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