Companies issue stock to raise capital that they in turn use to finance business plans and growth. By giving equity, or ownership, rather than accumulating debt, companies aren't saddled with repaying banks and financial firms. Instead, they share profits with investors -- who hope that their money will yield long-term appreciation in the value of the stock. Shares that have been issued and sold to the public are known as outstanding shares. They form the basis of trading in stock markets around the world.
The price of outstanding shares is a major part of how investors perceive the value of a company. Upward moving stock prices tend to attract the attention of investors who often feel that if outstanding stock is doing well, there would be interest in any additional stock offerings. Thus, if a company wants to raise more capital by issuing further stock, the solid performance of outstanding shares usually ensures a company's ability to easily raise more capital.
Among other things, outstanding shares are critical to important calculations that analysts, investors and executives use to determine the health and success of a publicly traded company. For example, market capitalization, or market cap for short, is calculated by multiplying the price per share by the outstanding shares. Likewise, earnings per share (EPS) is the net income minus dividends divided by the outstanding shares.
Companies that want both equity financing and the ability to recapture ownership later find issuing common stock appealing. Publicly traded corporations can buy back outstanding shares, giving investors a return on their investment and regaining interest and control in themselves. Purchasing outstanding shares is one way companies protect themselves from hostile takeovers. It can also ensure the value of outstanding shares remains high.
The trade of outstanding shares of stock is the basis of the American and global financial system. Stock markets largely involve the exchange of outstanding shares of stock. The continued ability to raise capital by issuing shares and finding millions of ready buyers is a foundation for the development of large enterprises and business development throughout the world.
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