Raising Equity in a Corporation by Issuing Stock Shares - dummies

Raising Equity in a Corporation by Issuing Stock Shares

When raising equity capital, a corporation issues stock ownership shares to persons who invest money in the business. These ownership shares are documented by stock certificates, which state the name of the owner and how many shares are owned.

The corporation has to keep a register of how many shares everyone owns, of course. (An owner can be an individual, another corporation, or any other legal entity.) Actually, many public corporations use an independent agency to maintain their ownership records.

In some situations stock shares are issued in book entry form, which means you get a formal letter (not a fancy engraved stock certificate) attesting to the fact that you own so many shares. Your legal ownership is recorded in the official “books,” or stock registry of the business.

The owners of a corporation are called stockholders because they own stock shares issued by the corporation. The stock shares are negotiable, meaning the owner can sell them at any time to anyone willing to buy them without having to get the approval of the corporation or other stockholders.

Stockholders own shares of public corporations or private businesses:

  • Publicly owned corporations are those whose stock shares are traded in public markets, such as the New York Stock Exchange and NASDAQ. There is a ready market for the buying and selling of the stock shares.

  • The stockholders of a private business have the right to sell their shares, although they may enter into a binding agreement restricting this right.

    For example, suppose you own 20,000 of the 100,000 stock shares issued by the business. So, you have 20 percent of the voting power in the business. You may agree to offer your shares to the other shareowners before offering the shares to someone outside the present group of stockholders. Or, you may agree to offer the business the right to buy back the shares. In these ways, the continuing stockholders of the business control who owns the stock shares.