Economics 105
Introduction
This article is focused on businesses and economics. In the last article, I wrote about individual investors and how they can profit from our system. In this article, I want to explain how businesses and public traded companies play a big role in our economy.
- April 2020
Public Traded Companies
In our free market system, anyone can go out and start a business. If you are successful and you want to expand your business, you can seek investors who are willing to take a chance and give you the capital to invest in new equipment, office space, and employees to grow your business. As you succeed, they reap the benefit. There is no guarantee. If you fail in your business, they lost their money.
When you reach a certain point, you may decide to take your company public. This involves meeting some regulations set by the government and providing some financial statements that demonstrate how well your company is doing. Taking a company public is a huge deal. This will allow your company to sell shares of stocks to raise additional capital to plow back into your business. It usually will make you very wealthy. The bulk of the stocks are owned by the original founders of the company and key employees and investors. When a company goes public, the stock becomes available on the open exchange such as the New York Stock Exchange or NASDAQ. This means anyone can buy or sell shares in your company.
As time goes, if your company continue to do well or innovate and sell more products and generate profits, the value of the stock will rise. This is good both for you the owner of the company and for the shareholders.
The incentive is monetary. Everyone wants to make more money. Investors are looking to make money. As an individual accumulate wealth, he or she wants to grow that wealth. You do so buy investing in equities, or real estate or precious goods.
By picking the right companies to buy, you can potentially make a fortune over time. For example, if you were lucky enough to buy Apple stock when it first went public, for a few dollars a share, you would be worth millions in today's market. That is because the company has done so well, that it has gone though several stock splits. Besides the rise in value of the stock itself, it has multiplied many folds.
Apple's stock has split four times since the company went public. The stock split on a 7-for-1 basis on June 9, 2014 and split on a 2-for-1 basis on February 28, 2005, June 21, 2000, and June 16, 1987.
If you had bought just one share of Apple, you would own 56 shares today after the stock splits. Those shares would be worth $14,896 at the current price of $266 per share.
Summary
Companies are a good thing. They produce products we want and need and they create jobs for people with good salary and they bring wealth to shareholders.
They can also be good corporate citizens by donating to charities and help our communities and even in time of national crisis, like the current coronavirus, provide assistance in manufacturing of needed products.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Jack Lee
