The best way to understand selling shares is by example. Consider this idea: For instance, say that you want to open a pizza parlor. You have studied a lot about the requirements for opening a pizza business, and you know how much money that you will need in order to get it started. You will spend about $500,000 up front, and you will spend about $250,000 every year on other expenses. You have calculated that your annual earnings will be around $325,000 each year, which gives you around $75,000 a year in profit. That is not too bad.
The problem that you run across is the fact that you have to have about $750,000 up front to get started. You don’t want to take out a loan that you will have to pay interest on. This is when you might want to consider looking for investors that will give you some money up front and will then own a “share” of the restaurant.
This is what people consider when they are considering selling stock to private or public investors. If companies believe that their company will be profitable enough that they will get a high return on their investment. If the investors put up $750,000 total up front for the business, then they will get around a ten percent return on their investment.
The owner of the business will set a beginning price for the company, and they will also determine how many shares of stock they want to sell. The good news is that you can set a price that reflects the future of the business, instead of sticking to the current business price. If you set the original price at $750,000, the investors will get a ten percent return on their investment. If you set the original price at double that amount, investors could expect five percent return.
The more shares you sell, the lower the price of the shares. This can make the stocks look better to new investors. Each person that buys stock will actually own a portion of the business, and that will give them some right to say how the company does business. The best way for a business owner to remain in control is to buy some of the shares themselves.