The Stock Market is a fantastic place to create wealth assuming you know what you are doing. The intricacies behind its movements, its periods of growth (known as bulls), its periods of decline (known as bears) and the hundreds or thousands of companies that create the market is mind boggling, but ultimately the market is just another arena in which to create wealth. The ability to make this wealth comes from companies needing to grow and expand, and therefore needing to borrow money from public and private investors in order to drive this growth further. The essential purpose of the share market is to allow companies to do this, to give each company an opportunity to create further capital so that it can also finance its future objectives.
In order to create this capital a company must raise funds through a number of possible channels. The two main ways to finance additional capital is to either issue new stock or shares to the public – which is referred to as equity financing – or by choosing to adopt debt financing whereby a company must borrow money from a lending institution (a bank or similar) with the knowledge that it must pay this money back with interest in the future.
The advantage of adopting equity financing is that the company does not have to pay back the money, with interest in the future to anyone, and only owes an obligation to the shareholders who provided capital that their investment will increase in time. A company that chooses to adopt debt financing must borrow this money from a lending institution. The disadvantage with this method is that it means the company’s overall debt obligations have increased, which applies more pressure on the company to ensure that the reasoning for borrowing the money is justified. Equally, investment projects that have been financed by the debt must give a rate of return that is greater than what was originally borrowed with the added interest.