Let's take a look at some reasons why a business may want to issue stock. Well, stock finances costs and growth for a business. Stock is an equity stake of ownership within the company.
Equity financing is a method of financing through the selling of a portion of ownership interest. Therefore, when a business issues stock, it's a form of equity financing; the business is issuing part of ownership in its company through the sale or issue of stock.
When a stock first enters the market, it enters through what is called an initial public offering, or IPO. It is the first time stock is offered to the public, and IPOs can be a great way to raise money. However, they are generally fairly expensive and quite time-consuming because, as you can imagine, there are a lot of regulations involved in putting them together.
Shareholders are the persons or organizations that buy the stock and then own that share of stock. Stockholders invest because they think they're going to see a potential gain, either through the raising of the stock price, so they can sell it for more later on, or possibly through dividend income.
With stocks, a dividend is the monies paid on a routine basis to shareholders from the profits of a company--for example, $0.25 per share. Capital gain of a stock is an earning based on the change of the price from the time of the stock to the time that you sell it.
EXAMPLEIf you buy a stock in a certain company at $5, and later sell it for $13, then you have a capital gain in that stock of $8. Market value is the current price of the stock on the open market. Therefore, market prices represent the price the stock is worth right now. That will help define what your capital gain is.
You may recall, from an earlier tutorial, there are two types of stock that can be issued by a company:
Retained earnings are the monies held from the net income, to be used by the corporation as opposed to dispersed to the shareholders. This is the part of the net income that the company or corporation holds back instead of distributing out to the different shareholders in the form of dividends.
Now, a higher retained earning means a lower dividend to the shareholders, and this may cause a decrease in the demand for the stock and also the price. A company that is reinvesting retained earnings is generally considered very attractive to investors. So, instead of simply holding that money back and keeping it in the bank account, if they are reinvesting those retained earnings back into the business to grow the business, this is generally considered to be a good deal for the shareholders.
Earnings per share is the financial value of each individual share of a common stock. To determine this number, you take the net income and divide that by the number of outstanding shares of stock.
EXAMPLESuppose you have 1,000 shares of stock and your net income is $1,000. In this case, the earnings per share of stock in your company would be $1 per share--1,000 divided by $1,000.
The ratio is evidence of earning power of the company, and it can also indicate the potential for profit, seen in companies with a high earnings per share, or companies that have a growing earnings per share.
Source: adapted from sophia instructor james howard