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1、HowtheStockMarketWorksWhyDoCompaniesIssueStock?Companiesthroughouttheworldissuenewstockshareseveryday.Butwhatisstock,andwhydoesacompanyissueit?Tohelpyoutobetterunderstandtheseimportantconceptsinthistutorialwewilldiscuss:?WhatisCapital??Equityvs.Debt?WhyDoCorporationsIs
2、sueStock??AdvantagesforStockHoldersLetusbeginbydefiningthewordcapital.WhatIsCapital?Let'simaginethatyoudecidetostartupyourownicecreamshopbusiness.Youwillneedtoinvestinequipment,foodsuppliesandproperty.Allthemoneythatyouinvesttostartyourbusinessiscalledcapital.Essential
3、ly,thecapitalofabusinessconsistsofallofitsassets(oritemstoassistinthecreationofwealth).Whatifitdawnsonyouthatyoudon'thaveenoughcashtobuyalltheneededassets?Let'sseehownewbusinessesandcompaniesdealwiththisproblem.TopEquityvs.DebtTostartanewbusiness(orfundanewproject)acom
4、panycanraisemoneyintwoways-bysellingsharesofequityorbyincurringdebt.Iftheownerofouricecreamparlorinvestedalltheirownsavingstobuythematerialsnecessarytostartthebusiness,theymadeanequityinvestmentinthecompany.Equityissimplyownershipofacorporation.Typically,ownershipunits
5、inacorporationarereferredtoasstock.However,ifourownerdidnothavenecessaryfundstostarttheirownbusinesstheycouldfinancetheiroperationinoneoftwoways:1.Issuestock(orcertificatesofpartialownershipinhiscompany)topeoplewhomaybeinterestedinhelpingtheirventureoutinreturnforaprop
6、ortionalshareoftheprofitsthatthecompanymightgenerate.2.Borrowmoneythatwillneedtobepaidbackwithinterest.So,whataretheadvantagesofsellingstock?TopWhyDoCorporationsIssueStock?Businessesissuestocktoraisecapital.Advantagesofissuingstock:1.ACompanycanraisemorecapitalthanitco
7、uldborrow.2.ACompanydoesnothavetomakeperiodicinterestpaymentstocreditors.3.ACompanydoesnothavetomakeprincipalpayments.DisadvantagesofIssuingStock:1.Theprincipalownershavetosharetheirownershipwithothershareholders.2.Shareholdershaveavoiceinpoliciesthataffectthecompanyop
8、erations.TopAdvantagesforStockholdersAspartownerofacorporation,youmaybeentitledtoshareintheprofitsofthecompany.Therei
