The Purpose of the Stock Market
Business is the cornerstone of every 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.
