Investing in shares is a lucrative endeavor for individuals who want to get some profit on their savings. While buying stocks of various companies makes investors better as they get dividends and profit by selling shares in the market, it also offers a huge benefit to the companies and this is the primary reason why companies issue stocks.
Individuals who are interested in making money through trade of stocks must know about this mechanism which helps businesses and investors and thus prompts overall economic growth. For this, they should know the working mechanism of this system.
Primary Reason for Issuance of Stocks
Any newly found business or even a developed one needs funds to finance its operations. Companies usually raise money from two resources. They either issue stocks or take credit from banks or do the both.
In the case of issuing stocks, they need to pay dividends from profits to investors. And, in case of taking credits from banks or financial institutions, they need to pay interest on loans they have received. Either way, they get some funds to finance their business and new projects.
Selling Stocks in Primary Markets
This business of selling stocks is not such simple. While the primary reason for issuing stocks is to raise investment, it can have some secondary purposes as well, which can be distinguished by understanding primary markets and secondary markets of shares.
Companies sell stocks in primary markets to raise investment. Here, they sell new and fresh stocks which are called IPOs (Initial Public Offerings). It is to be noted that there are different types of businesses and not all of them sell shares in primary markets. Usually, these are public limited companies that make initial public offerings.
Selling Stocks in Secondary Market
While businesses make initial public offering in the primary market for the primary reason of raising funds, they also facilitate their trade via stock markets. Like, investors who have bought these shares also trade them in the secondary market. So, shares of the company, on one hand, serve the primary purpose of raising investment for the business and on the other hand, they act as a new financial product that people can buy and sell in financial markets.
What Factors Define the Market Price of Share
The market price of a company’s shares depends upon its profitability and various other factors. If a business is less profitable, its share price is likely to fall due to a decrease in demand. In the same way, if a business is profitable the market price of its share increases due to an increase in the demand.
But, profitability is not the only factor which impacts the share price of a company. In fact, these are the speculations that shape up the graph for price. Usually, factors like fire, earthquake, economic stability and political events play a major role in determining a bullish or bearish trend in the stock market.
But, in a long run fall in share price doesn’t impact the primary reason of a company which is to raise investment, because once it offers them as an IPO it has already generated the required capital. But, later fall and rise in stock price due to various factors can indeed impact the company’s market reputation and investor’s confidence in future.