Markets Explained

The Ins and Outs of Equity Financing

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The Ins and Outs of Equity Financing

Debt financing is one way to finance a business. Another way to finance a business is through equity financing, which represents the sale of ownership in a company to raise funds for the business.

This primer will help you to establish a firmer understanding of equity financing.

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Starting at the basics: what exactly is equity financing?

According to the Federal Reserve Bank of San Francisco, “Equity financing allows a company to acquire funds (often for investment) without incurring debt.” When a company uses equity financing, it sells stock to the public. Stock ownership represents an ownership in the business. A business’s stock price determines how much capital it can raise if it decides to issue new shares of stock. An IPO, or initial public offering, is when a company first decides to sell stock in the company to the public.

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How does equity financing provide access to capital?

Equity financing brings in other investors to help grow a company. Nobel Prize-winning economist Robert Shiller said in Finance and the Good Society, “It is important that companies be able to sell shares to the public, for that process engages a large number of people in their economic undertakings. It decentralizes the allocation of capital, potentially to involve any member in society.”

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Can you explain more about stock ownership representing an ownership in the company?

Stock owners have the right to vote on important business matters and have a claim to the firm’s future income. As a shareholder, you are part-owner of a company and that company’s management has a responsibility to be accountable to you. You have an important voice in influencing policies that impact shareholder value, the culture of the company and the impact the company has on the world around it. Proxy voting is the primary means of ensuring corporations are accountable to their shareholders – whether they are individual or large institutional investors.