1.3Why do companies need money?
Companies need money (called capital) to start, run and grow: to build factories, buy machines, hire people, open shops and do research.
Growth usually costs money before it brings in money. A company has three main ways to get it:
- Use its own profits (internal funds).
- Borrow (a loan from a bank, or by issuing bonds). Borrowed money must be repaid with interest.
- Sell ownership (shares) to investors. This money is not repaid, but the new owners share future profits.
Ramesh wants a second tea stall costing ₹3 lakh. He can save for 2 years, take a bank loan at interest, or ask his friend Suresh to give ₹3 lakh in return for a share of the profits. The last option is exactly what selling shares means.
When a company lists on the stock exchange through an IPO (Initial Public Offering, covered in Level 10), it sells new shares to the public and uses the money for things like new plants, paying off debt or expansion.
- • No cost
- • Slow
- • Must repay
- • Pays interest
- • No repayment
- • Owners share profits
- ✓Selling shares gives money that never has to be repaid.
- ✓There is no fixed interest burden.
- The original owners now own a smaller percentage (this is called dilution).
- Too much borrowing can sink a company if profits fall.
- Companies need capital to grow.
- They can use profits, borrow, or sell shares.
- Selling shares means selling part-ownership.
Q1. What is the main difference between a loan and selling shares?Show answer
A loan must be repaid with interest. Money from shares is not repaid; investors become part-owners instead.
Q2. What is dilution?Show answer
When a company issues new shares, existing owners’ percentage of ownership becomes smaller.
Q3. Give two uses of the money a company raises.Show answer
Building factories, buying machines, hiring, repaying debt, research, opening stores.