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Bank borrowing is more customized than issuing bonds, so it often works better for relatively small firms. The bank can get to know the firm extremely well—often because the bank can monitor sales and expenses quite accurately by looking at deposits and withdrawals. Relatively large and well-known firms often issue bonds instead. They use bonds to raise new financial capital that pays for investments, or to raise capital to pay off old bonds, or to buy other firms. However, the idea that banks are usually used for relatively smaller loans and bonds for larger loans is not an ironclad rule: sometimes groups of banks make large loans and sometimes relatively small and lesser-known firms issue bonds.

Corporate stock and public firms

A corporation    is a business that “incorporates”—that is owned by shareholders that have limited liability for the debt of the company but share in its profits (and losses). Corporations may be private or public, and may or may not have stock that is publicly traded. They may raise funds to finance their operations or new investments by raising capital through the sale of stock or the issuance of bonds.

Those who buy the stock become the owners, or shareholders    , of the firm. Stock represents ownership of a firm; that is, a person who owns 100% of a company’s stock, by definition, owns the entire company. The stock of a company is divided into shares    . Corporate giants like IBM, AT&T, Ford, General Electric, Microsoft, Merck, and Exxon all have millions of shares of stock. In most large and well-known firms, no individual owns a majority of the shares of the stock. Instead, large numbers of shareholders—even those who hold thousands of shares—each have only a small slice of the overall ownership of the firm.

When a company is owned by a large number of shareholders, there are three questions to ask:

  1. How and when does the company get money from the sale of its stock?
  2. What rate of return does the company promise to pay when it sells stock?
  3. Who makes decisions in a company owned by a large number of shareholders?

First, a firm receives money from the sale of its stock only when the company sells its own stock to the public (the public includes individuals, mutual funds, insurance companies, and pension funds). A firm’s first sale of stock to the public is called an initial public offering (IPO)    . The IPO is important for two reasons. For one, the IPO, and any stock issued thereafter, such as stock held as treasury stock (shares that a company keeps in their own treasury) or new stock issued later as a secondary offering, provides the funds to repay the early-stage investors, like the angel investors and the venture capital firms. A venture capital firm may have a 40% ownership in the firm. When the firm sells stock, the venture capital firm sells its part ownership of the firm to the public. A second reason for the importance of the IPO is that it provides the established company with financial capital for a substantial expansion of its operations.

Questions & Answers

what is distribution
umar Reply
1.what is distribution? 2.what are factors affecting distribution? 3.releat what you are writing in the contest of economics and Nigeria situation
what is demand
Obianyido Reply
The market for you In Ilorin has the following demand and supply equation Qd + 5p =9520 Qs =2.5p - 125 a) determine the equation price and quantity b) Explain the situation when the market price is below the equlibrum price
Rasheee Reply
What is scale of preference
Richmond Reply
Pls what is scale of preference
scale of preference is a arrangement of individual wants in order of priority
the arrangement of people want inoder of demand
explain whether decisions in microeconomics involve an opportunity cost
Sonali Reply
What is primary activity
Yeboah Reply
indigenization is the dominance or influence of people native in a particular place or
what's indigenization?
Enoch Reply
What is economics?
Penuel Reply
economics is a social science which studies of human behaviour as a relationship between end and scores which have antanetuve use
economics is the study of complicated tables and chart, statistics and numbers but more specifically it is the study of what constitute human rational behavior in endeavor to fulfill human needs and want
what are the five laws of demand
Uleme Reply
the ppc curve slopes down due to Central problem of economy.......
what is economic by James Stewart
what is economic
Okechukwu Reply
Economics is a science of wealth
what is economic and what is the definition
economic is science and arts both........
to me is a science which study human behavior as a relationship between ends and scare which have alternative use
economic is a science which study human and environment
Explain any five limitation to division of labour
Aliyu Reply
size of the market. for example..let's take a look at a barbing saloon. the number of hands needed there isnt up to the one needed in a company or production line because the number of people the barbing saloon is serving cant be up to the ones of the company
Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are: What to produce?How to produce?For whom to produce?What provisions (if any) are to be made for economic growth?
Yusuf Reply
what is the basic economic problem
Arnold Reply
what is the basic problem
importance of elasticity of demand
Ayuk Reply
what nature is price elasticity
nature of price elasticity
is it de basic economic problem
Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are: What to produce?How to produce?For whom to produce?What provisions (if any) are to be made for economic growth?
All teachers economic development
what is macro economics

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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