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When a company issues shares, I understand how it would make sense for it to pay potential dividends if I purchased shares and thus enabled it to use my money to conduct business and make a profit. What intuitively doesn't make sense to me, however, is why the company would agree to keep paying me dividends on the basis of that initial investment, years after they've spent the money I invested. What does it gain? Is offering ownership simply what they need to do in practice to attract investors, and anything short of that would not be viable?

One argument that can be made is that possibly, the long-term success of the company wouldn't have happened without that initial investment of the shareholder, but that seems too speculative to be accepted a priori. Another argument is that it creates a supply-and-demand driven market for co-ownership, but that seems to only make sense if the company (i.e. founders, employees ...) owns most of the shares itself (i.e. it can sell them later at a higher price to raise money).

I read How does the purchase of shares on the secondary market benefit the issuing company? which is related, but ultimately a different question.

EDIT

To clarify some points in the light of various ill-mannered comments:

  • I'm trying to better understand why stocks exist in the current form, contrary to potential other ways to raise money for a company.
  • I understand the concept of ownership and am not implying that something should not be traded when owned; I'm merely trying to better understand why companies would give away ownership in the first place, as they currently do. It's obviously attractive to buyers, but there must be practical reasons that make them attractive to companies as well (in contrast to bonds and other real or hypothetical instruments).
  • There are disagreements about the morality of profiting via stock ownership in political/moral philosophy. One question is the one of being ethically entitled indefinitely to profits derived from the work of others because of an initial investment, and I'm trying to deepen my understanding.
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    You’re persisting with this idea that companies “give away ownership”. That’s your misconception. Companies don’t and can’t own themselves — the sale of shares simply changes their ownership.
    – Mike Scott
    Nov 8, 2020 at 17:50
  • @MikeScott apologies for not expressing myself more clearly - I'm aware of what you pointed out. Perhaps a better way to frame what I wrote would be to ask why original founders/owners and people doing the actual work would find co-ownership in the current sense justifiable? The simple answer so far appears to be because potential investors would not accept anything less. Is that making more sense?
    – user16308
    Nov 8, 2020 at 17:58
  • "There are disagreements about the morality of profiting via stock ownership" This sounds like an entirely different question. Your question might be improved if you focussed on one question (why do companies sell shares) rather than two.
    – NPSF3000
    Nov 9, 2020 at 4:23

3 Answers 3

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Why would the company agree to make me a co-owner entitled to its profit share if it doesn't get any assets from me?

In your example: because we live in a world where when you own something, you can sell it. It is not the company deciding, it is the prior owner of the shares. It would be illogical if he could not sell an asset HE - not the company - owns. Shares are generally tradeable, the company has no say. WIth the same (sorry, naive) argument you could argue "why does a car company allow one to sell used cars, what does the car producer have from it?". Point is: once the car is sold, the producer has no say. Once a company gives shares out and collects the money - the shareholders OWN ALL OF THE COMPANY and this ownership is transferable.

The company does not gain anything because it has nothing to gain after "spending the money". Your logic is really off- by your logic the company could get 100 million, build a factory (oh, that is spending the money) and then not give it's owners anything because "hey, the money is spent, thanks for the building". The company collects money and gives people part of ownership. THis is a contract - it is owned then by the shareholders. It is not "granting dividends and thus co-ownership". The Board of directory - which is the representatives of the owners (!) decides that a part of the profit of the company is distributed back to the owners.

What intuitively doesn't make sense to me, however, is why the company would agree to keep paying me dividends - i.e. to grant me co-ownership

You have it really backward. It is not the dividend that grants you co-ownership. It is the co-ownership that grants you the dividend. It is acutally not co-ownership in your example - it is OWNERSHIP. The company is not "co-owned" (as in partially) owned by shareholders, it is TOTALLY owned by the ones owning SHARES in it. Look up the word share - to share something, you get a share of something. The word for a stock share comes from SHARING. The outstanding equity shares together own ALL of the company, not part.

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  • Thank you for answering, but it seems to me that you're making a circular argument. If the initial incentive of the company is to raise funds, then why would it agree to offer ownership? If the company gets 100 million from investors/shareholders and builds a factory using that money (at this point, this is simply a loan), then makes a profit using it, it seems obvious how the original investors are entitled to money proportional to their investment. It's not obvious why they would be entitled to profit 30 years down the road when perhaps the factory is no longer even operating.
    – user16308
    Nov 8, 2020 at 15:22
  • "If the initial incentive of the company is to raise funds, then why would it agree to offer ownership?" Because in our world you either do that or have the collateral to pay interest rate. And as comapeneis in the beginning habve no collateral - you get no capital without oding that.You make it sound like it is "oh, I just do it wouthout need". This is how society agrees to fund companies that look for money. Why should I go into a SUPER HIGH RISK LOAN without a way to revcover the money ON TOP of 9 of 19 companies going bankrupt?
    – TomTom
    Nov 8, 2020 at 15:29
  • Your car analogy doesn't seem valid, either - once the car is sold, you are the owner, but you are not entitled to the profit of the company that sold you that car, either. As for the dividends/co-ownership relationship: yes, I'm aware of what you're pointing out, but the direction of the relationship in no way invalidates the question. Please read in context.
    – user16308
    Nov 8, 2020 at 15:29
  • "It's not obvious why they would be entitled to profit 30 years down the road when perhaps the factory is no longer even operating" - sorry, are you having problems understanding ownership? I mean, you parents own a house? Why should you inherit it when the original loan is long paid back? You own part of the company. The company develops. You STILL own part of the company.
    – TomTom
    Nov 8, 2020 at 15:30
  • Your answer about "super high risk loans" seems to touch something that is actually relevant in terms of addressing the motivation of the company. "The world" and its economy is not a self-evident uniform place, and as you're doubtlessly aware what you presuppose here is not globally the case and there are entire political philosophies disagreeing with the very concept of stock exchange. What I'm doing is trying to understand different viewpoints better.
    – user16308
    Nov 8, 2020 at 15:39
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I think there might be a couple of things here to clear up, that might help reduce confusion:

1) Companies are owned by shareholders

A company does not own itself. Instead, shareholders (which are typically people in the end) own companies.

As such the question isn't 'why would a company grant co-ownership'... but 'why would existing owners want to share ownership in the company?'

2) People (tend to) like having more money, not less

In your question you ask:

"One argument that can be made is that possibly, the long-term success of the company wouldn't have happened without that initial investment of the shareholder, but that seems too speculative to be accepted a prior."

The problem here is you're taking a backwards looking perspective - but investments are made with forward looking perspectives.

Let's say you own 100% of a company. It's worth $500,000. You would like more money. One way to achieve this is to grow the company.

Growing a company typically takes money and the faster you want to grow a company, the more money you need. It gets even worse, not having money can often mean no growth... for example if you don't have enough money to build a factory. In some cases, not having enough money can even lead to loss of value - e.g. if a competitor moves faster and takes over the market.

3) There are multiple ways to raise money

There are many ways to raise money (aka capital).

  1. Use existing revenue streams

This is a great way of raising money - and costs you no ownership! However, you might not have revenue... and even if you do it may not be enough to grow quickly.

I've worked at startups where revenue has grown 50%, 100% or more a year... and yet that still be too slow for that market.

  1. Put in your own money.

This is a great way of injecting money (also known as capital) into a company, achieving growth, and still maintain ownership. However, it requires you have this capital and be willing to invest it into this particular company.

  1. Get a loan.

Loans are great - you get the capital, and don't lose any ownership! The problems are:

  • Will anyone loan you the money (and enough)?
  • What interest rate will they charge - often this can be a high a% to offset risk.
  • Who owes the money? Sometimes, especially for smaller companies, the owners become personally responsible for the loan - so if the the company goes under they still owe the money.
  • When do you have to pay it back? Loans typically want payments to start immediately... but you're still growing the company. So at the time, you want money put into the business... the bank wants to take money out of the business!

There is one other option...

4) Selling shares

Selling shares is great, you get the money needed to grow, you don't owe any monthly payments (especially when growing) and since shares are forever, you can often get good terms compared to other options. You also get other owners who are also invested in the business and might find ways to help it succeed that aren't monetary.

Yes, you own less % wise of the company. However, the goal isn't to own the most % of the company but to have the most money. A smaller % of a larger company can be worth more than a large % of a small company.

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  • Thank you for answering. In summary, the answer seems to simply be "companies offer ownership because it's often the only viable way to attract investors", other purely philosophical and ethical considerations notwithstanding.
    – user16308
    Nov 8, 2020 at 17:03
  • Just to clarify, with "company granting co-ownership" I obviously meant the original owners/funders and/or people doing the actual work, but this is a philosophical angle that is somewhat out of scope here.
    – user16308
    Nov 8, 2020 at 17:09
  • @w128 It's possible to raise money without giving away shares, but that's not an investment and therefore they're not called investors. RE "I obviously meant the original owners/funders" Properly framing the question might help understanding it. For example "why companies would give away ownership" gives emphasis on the 'company' 'giving' something, when in reality it's the current owners selling a portion of ownership in exchange for money (either to themselves or to the company to make it more valuable). Nobody asks why a car would give away ownership.
    – NPSF3000
    Nov 9, 2020 at 4:17
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Companies offer co-ownership of the company for the money. In many instances co-ownership, i.e. a slice of the profits, is either the only thing the company has to trade or the only thing that the counter-party will accept.

For example, let's say you have a really cool business plan but you need $100 million to get that off the ground. Let's say further you've managed to go round all your relatives, your friends and yourself and you've managed to get $2mil together. It's extremely unlikely that a bank will lend you the other $98 million - they're taking basically all the risk at that point. So you approach a venture capitalist/angel investor. They're going to want a sizable slice of your company and probably a say in how it's structured and run. Boom co-ownership. There are a couple of routes out for your angel investor and one is to split it up into shares and sell it on the stock market.

Ok, so you start small and leave off the angels. You build and you build and you work. With that small amount of capital you manage to build a huge shopping chain, mall positions, supply chains the works. It's taken 20+ years but you've built it - making millions. You'd like to get a load of cash out now, buy that island and great big boat like the Van Helsings down the road. So your company is worth $100 billion. Turns out, not that many people have that kind of cash kicking around. You approach a bank and get your company floated on the stock exchange. Your family retains 60% ownership and you wander off with $40billion (less hefty bank fees). Yes, you have to share the profits but you can worry about that from a place few people even see in pictures let alone experience.

There are other scenarios too. One of the most common is probably a rights issue. A struggling company might be at risk of breaching its loan covenants or have other, hopefully temporary, shortages of cash. They will struggle to get reasonably-priced credit in those scenarios. At that point issuing more shares to raise cash is less unpleasant than going bust. For a current ongoing one at the moment, check out Rolls Royce. Their current strategy is to sell the engines at or just below cost and make up the money on ongoing maintenance and services. Flying is massively reduced at the moment so very little is coming in. Hence they're issuing more shares to raise cash to get over the current crisis.

On your other question, once the share exists, it belongs to the person who bought it. They can then sell it on to other people. A stock exchange just makes that easier for publically traded companies.