When corporations need to raise funds for business operations or expansion, they may sell ownership shares called stock to investors in exchange for cash investments. These stockholder investments provide corporations with an equity financing source. In return, stockholders obtain certain ownership rights in the corporation.
Stockholders invest cash to buy ownership shares in corporations
Corporations sell stock to raise cash from stockholders to fund business activities. Each stock share represents a fractional ownership interest in the corporation. The total amount stockholders invest to purchase shares is called shareholders’ equity. It appears on the corporation’s balance sheet under the stockholders’ equity section. So stockholder investments of cash increase the equity the business has available to operate.
Stockholders receive ownership rights for their equity investments
In exchange for providing equity cash investments, stockholders gain certain ownership privileges. Key rights stockholders receive include: 1) Voting rights to elect the Board of Directors who oversee the corporation’s management; 2) Rights to dividends if the Board declares dividend payments from profits; 3) Rights to assets remaining if the company ever liquidates. So by investing cash for stock shares, stockholders purchase ownership rights in the corporation.
Equity stock investments involve more risk than debt investments
Unlike bond investments that promise fixed interest and principal repayments, equity stock investments do not guarantee stockholders any returns. The value of the shares and dividends depends on how well the business performs. If the corporation thrives, share values and dividends may rise substantially, producing large returns for stockholders. But poor performance could cause shareholders to lose most or all of their invested cash. So equity investments carry higher risk, in exchange for the ownership rights stockholders receive.
Corporations may use stockholder cash investments for many key business purposes
Cash raised from selling stock shares allows corporations to fund inventory, equipment, R&D, marketing, expansion projects, operating expenses, debt repayments, and more. So equity financing from stockholders provides a versatile source of investment capital to corporations. Stockholder cash can support corporations’ core operations and strategic growth initiatives. And their ownership rights give shareholders a financial stake in seeing the business succeed.
In summary, stockholders invest cash in corporations to purchase ownership shares called stock. Their equity investments provide corporations with financing while granting stockholders specific ownership rights. But these rights also mean shareholders assume greater risk than debt investors do.