Shares crucial to growing company
WE HAVE been looking at shares and dividends from the investor's perspective, but what about the company's? While it may not seem important, the rationale behind shares is.
A share is a useful tool for a growing company. To start a company, a few people may invest a small amount of capital and some of this cash may be given in the form of a bank loan. If it is a growing company more will probably be needed for extra machinery, factories, offices and investments.
Enter the shareholder.
A share is a way in which a company can borrow. It receives a loan but does not have to pay it back in the strict sense of the term.
Wait, you say. A dividend is like paying back a loan.
A loan has interest, dividends do not. Moreover, companies may pay lower dividends so it can reinvest in the company, as stated last week. Investors may agree in the hope of a capital gain from their shares as the company grows.
But equity has one more benefit to a company. A person who has started a company and seen it successfully grow may be able to proudly boast it is all because of him/her. But the owner does not necessarily get to put that money in the mansion they always wanted.
Equity can help again by freeing up cash.
The young entrepreneur can buy that mansion or the last generation of a dying dynasty may seize the opportunity to offload some of its investment on to someone else.
The effect is the family or entrepreneur is no longer owner and manager. Once shares come into play, a company's board of directors manage the business on behalf of the shareholders who are the owners.