Monday, February 23, 2009

When A Company Needs Money, How Do They Get It?

When a business needs money, they can get it one of two ways. They can sell part of it – or they can borrow. Whey they sell stock, they sell part of the company. But a company may not want to give away ownership of all of the company. They may prefer for you to invest in their company as a bondholder. A bond is a promise to pay off the loan. So if they need money, they may want to borrow it – so they sell bonds – and promise to pay back the loan.

Now, let’s say the company does really well, and the value of the company increases. Does the value of your bond increase? No – because it’s just a promise to repay the loan. But if you own stock in a company, and the value of the company goes up, then your stock is worth more.