The stock exchange is a market in which securities are bought and sold. It gives companies the ability to access capital through share purchase plans, initial public offerings, and various other alternatives.
In general, this involves offering shares in a company in return for money. This makes the recipient part-owner of the company. This also helps the company spread its risk.
The owners of the shares may go on to sell them for a profit further down the track in the secondary market.
On top of this, there are various other benefits for companies that list on the stock exchange:
- Increased public exposure — They get a bigger profile compared to private companies. This is because publicly listed companies often receive media coverage. This can entice new customers and clients, increasing the overall value of the company.
- Employee incentive programmes — This allows executives and workers to accrue shares. They are generally referred to as performance shares. They can be given to employee as a reward for meeting certain expectations. For example, meeting revenue targets or share price targets. This can encourage employees to achieve the goals given to them and attract top talent. This, in turn, can accelerate the company’s growth.
Why do companies list on the stock exchange?
Companies list on the stock exchanges is to raise money from the public at the best rates possible.
How has this benefited some of the most well-known companies?
- McDonald’s Corp [NYSE:MCD]
McDonald’s is a global icon and a beloved brand. Since going public in 1966, the company’s growth has been extraordinary. They have expanded to over 100 countries, and they have over 30,000 outlets worldwide. Their Big Macs and Happy Meals have delighted customers of all ages.
Not even the COVID-19 pandemic has dampened the appeal of McDonald’s. Over the past few months, as some countries have started to lift their lockdown restrictions, the company has enjoyed pent-up demand as consumers rush get their fast-food fix.
No great surprise there. McDonald’s has built its empire with consistency. It has actively sought out fresh ways to compete and adapt to changes in consumer consumption. By innovating, their profits remain steady.
Shareholders have benefited from McDonald’s positive track record in paying dividends and stock splits. Strategic moves have succeeded in delivering good long-term return.
- Johnson & Johnson [NYSE:JNJ]
Look at your favourite brand of bandage. Or shampoo. Or medication.
Chances are, it was made by Johnson & Johnson.
Johnson & Johnson is a household name and a global leader in the healthcare sector. It creates innovative products and services by embracing medical research.
Johnson & Johnson went public in 1944, before most of us were even born. Back then, the stock exchange was not how we know it today. In fact, those were the days where milk only cost 15c!
From humble beginnings, Johnson & Johnson’s growth trajectory has surged in recent years.
- Facebook, Inc [NASDAQ:FB]
Do you have a Facebook account? Do you use it to keep in touch with your family and friends? Do you enjoy sharing stories, pictures, and videos?
Yes, Facebook has single-handedly transformed our cultural landscape with social media.
Facebook is one of the FAANG Stocks — a group of incredibly influential and powerful companies that also include Apple, Amazon, Netflix, and Google.
It might be hard to believe it now, but Facebook founder Mark Zuckerberg was originally reluctant to take the company public. His reason? He was concern that he might lose control over the direction of Facebook.
But, ultimately, Zuckerberg had a choice. Between 2004 and 2012, Facebook’s private shareholders expanded to more than 500. By law, this meant that the company had to go public.
So, Facebook reluctantly got listed on the Nasdaq Stock Exchange. And, surprise, surprise, this social-media company has flourished since then, making a bonanza of profit for stockholders.
As you can see, in each case, listing a company publicly on the stock exchange has turned out to be a positive move. There is upward growth for shareholders, and consumers have also benefited from innovation in products and services.
It’s a win-win.
How do companies earn profit in share market?
Companies do not earn a profit directly from the share market but through its operation.
They sell shares to the public to raise capital. This allows them to expand. In return, the company sacrifices its ownership rights by transferring that to its shareholders.
Why do this?
Well, let’s just imagine a pie chart.
It starts with you running your own company. You currently have a $100,000 net income, and you have a controlling stake of 100%.
So, what happens if you take your company public and expand your operations by selling shares?
Potentially, you could increase the size of your pie by $1,000,000.
This is where things start to change:
- Let’s assume you give up 60% ownership of your company to your shareholders.
- This leaves you with only 40% ownership.
- However, your 40% ownership of $1,000,000 gives you $400,000.
- Congratulations — you are now $300,00 better off than you were originally.
This is why taking a company public can be financially rewarding.
Still, you have to remember: listing a company on the stock exchange does cost money.
To find the true profit of a publicly listed company, you must subtract all the fees associated with being on the stock market, the initial listing, and ongoing costs
The New York Stock Exchange (NYSE) is the largest American stock exchange. It has a market capitalization of over $30 trillion. Listing a company can cost up to $500,000, and ongoing yearly fees is expensive.
Still, as a company grows its operation, it can generate more profit. These fees might seem a lot to us, but for a multimillion-dollar corporation, this might be a drop in the ocean.
This makes it beneficial and worthwhile to go public.
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