Why Do Companies List Their Stocks On Stock Markets?

Thus far, we’ve understood how stock markets are useful for investors — you can buy a stock at a low price, and sell it at a high price, and make yourself a nice profit. But what about the companies that actually trade on the stock markets? What’s in it for them to have their stock trade on the markets?

Companies list themselves on stock markets because they want to raise money to fund their operations and grow their businesses. Imagine you’re running a company, and you need money to set up a new factory. You can go to a bank and take a loan, but that means high interest rates, and penalties if you don’t pay. But you’re an established company with good prospects, and many people might be willing to help you fund your new factory, as long as they can become part owners in your business.

You are willing to give up a certain part of your company — say 10% — in exchange for the money. You do this by issuing 100 shares, and price each share at Rs. 10. Each share, then, represents 10/100%, or 0.1% of your company — you issued shares for 10% of your company, and there were 100 shares in all.

You then sell these shares for people who wanted to buy them. You receive Rs. 100*10 = Rs. 1000, and the 100 people who bought your company’s shares each own 0.1% of the company. These shares will then start trading on the stock markets. Lets say someone who wasn’t one the original list of 100 people who bought your shares sees the progress of your factory, and thinks it’s moving along quite well. He’s willing to become a part-owner in your business for Rs. 11 per share. If one of your existing shareholders is willing to sell his share for Rs. 11, the share will trade on stock markets. The price of your stock will then immediately become Rs. 11. This would mean that all other 99 stockholders will also benefit — their stocks are also worth Rs. 11 on paper, while they only paid Rs. 10 for them. You benefit too — you, after all, still own 90% of the company, and it’s also become more valuable.

Next: What Is An IPO?

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