Question 11 of 11intermediate🔍 AnalyzeEssay4 marks

Why do companies issue shares, and why do people buy them? Are there any benefits of owning shares?

Correct Answer

Companies issue shares to raise capital for their operations without borrowing from banks or taking loans.

By issuing shares, companies can fund expansion, purchase machinery and raw materials, launch new products, and grow their business. Shareholders become part-owners of the company, and the company benefits from this capital while spreading ownership among many investors.

People buy shares to invest their savings with the expectation of earning returns.

Benefits of owning shares include potential profit when share prices increase, allowing investors to sell shares at a higher price than purchased. Investors may also receive dividends when companies distribute profits to shareholders.

Additionally, share owners become part-owners of the company and have the ability to convert shares back to money by selling them on the stock exchange.

However, share prices fluctuate based on company performance, government policies, economic conditions, and other factors. Investors also bear the risk of losing money if share prices fall.

Exercise: THINK ABOUT IT | Q: 4 | (Page Page 17)
For More Understanding

Explanation

The chapter explains that a share is a part-ownership in a company, and when someone buys a share, they become a part-owner of that company due to their investment. The more shares owned, the higher the ownership. Holding stocks allows individuals to put their savings where they expect to see an increase in their value when share price increases. Issuing shares helps companies raise funds for their operations. The chapter also notes that trading shares can bring gains or losses as prices fluctuate due to company performance, government policy changes, political instability, wars, or economic shocks.

Solution Steps

  1. Companies issue shares to raise capital without borrowing from banks or taking loans

  2. Share capital funds expansion, machinery, raw materials, and new product launches

  3. Shareholders become part-owners of the company

  4. People buy shares to invest savings with expectation of returns

  5. Benefits include potential profit from selling shares at higher prices

  6. Benefits include dividends when companies distribute profits

  7. Benefits include part-ownership and liquidity through stock exchange

  8. Risks include price fluctuation due to company performance, policies, and economic conditions

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