This section attempts to answer the two biggest why's of the stock market. What's in it for the company? and what's in it for me?
What are the benefits for a company to "go public", offering their stock to the public?
Quite simply, most companies go public for the money. They are "selling" part of their company to the public. In doing so, they lose some of their control. They must now report to a Board of Directors which represents the stockholders. The money raised through the initial public offering is often used to pay off debt, for working capital, to fund new projects, or to expand their market.
Example: Amazon.com (NASDAQ:AMZN) went public on May 15, selling 3 million shares at $18 per share. They cleared about $50 million after fees and expenses.
What are the benefits to an investor?
Appreciation in stock price.
Stock prices typically go up in relation to the company's earnings. Although this is very simplistic, and not always the case, we'll work with this assumption for now. In later sections, when we discuss valuations, we'll see other factors that affect the stock price.
Example:If you buy stock in Intel (NASDAQ:INTC) on January 1, 1997 at $130 per share and on June 9, 1997 it is selling for $150, you have made $20 per share, which is about a 15% return over less than a six month period.
A typical stock will appreciate an average of 10 to 20% per year, although this varies tremendously. Some stocks may lose value, or even go to $0 if the company goes out of business. Other stocks may increase in value several times over.
Example: We've seen this in our stock club. In one year, our stocks have ranged from -40% to +40%, with the net being about +10%.
Dividends.
Dividends are another benefit with some stocks. The returns, for those companies that do pay dividends, are usually in the 2 to 5% range.
Example: Chrysler Corporation (NYSE:C) on May 15, 1997 declared a quarterly dividend of $0.40 per share. Everyone who owns stock in Chrysler as of that date will receive $0.40 per share in cash for each share of stock. At a stock price of about $35, this works out to about 5% annually. Since they have earnings of a little over $5 per share, they are paying out about 30% of their profits in dividends.
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