Selling Stock In Private Company
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At some point of time, every company needs to raise funds for which either the company can borrow money in the form of a loan or raise the funds by selling a part of the company by issuing company stocks. Borrowing money in the form of a loan (from an individual or a financial institution such as a bank) or by issuing bonds is known as debt financing while selling a part of the company by issuing company stocks is known as equity financing. According to financial experts, issuing stocks is a better option for a company because it does not require the company to pay back the loan or pay bulky interest on the borrowed money.
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When an investor buys a debt investment such as a bond, he can expect guaranteed return for his invested money plus additional interest payments. However, when an investor buys an equity investment such as shares, he attains partial ownership and stake in the company. As a result, he gets exposed to the risks associated with the company. If the company is going bankrupt, in that case the investor’s entire investment is worth nothing at all. However, if the company is making profits then the shareholder earns a lot returns for his investment. Some companies even reward their investors with rich dividends although no company is obliged to pay out dividends. In case the company does not pay out dividends then in that case an investor can make money on his shares only through an appreciation of the stock price in the open market.
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