Why companies sell shares and how stock exchanges work

Why a company sells shares

Companies need money to grow. They might want to build a factory, open new stores or develop a new product. They can borrow from a bank, but loans must be repaid with interest. Another option is to sell part of the company to investors. In return for their money, investors become part owners.

The first time a company sells shares to the public is called an IPO, an initial public offering. After that, the company is "listed" or "public", and its shares can be bought and sold by anyone with a brokerage account.

What a stock exchange does

A stock exchange is a marketplace where shares are bought and sold. Think of it as a very well organized bazaar with strict rules. Sellers say what price they want. Buyers say what price they will pay. When the two meet, a trade happens.

Some of the largest exchanges are the New York Stock Exchange and Nasdaq in the United States, and the London Stock Exchange. Azerbaijan has the Baku Stock Exchange, though most trading there is in bonds rather than shares.

Today almost all trading is electronic. You do not go to the exchange yourself. You place an order through a broker, and the broker sends it to the exchange.

Who you are trading with

Here is an important point for beginners. After the IPO, when you buy a share, your money usually does not go to the company. It goes to another investor who is selling. The exchange simply connects the two of you.

So why does the company care about its share price? A higher price makes it easier to raise money in the future, rewards owners and managers who hold shares, and shows confidence in the business.

Why exchanges are regulated

Exchanges and listed companies must follow rules. Companies have to publish financial reports regularly and tell investors about important events. This openness is one reason why buying shares on a real exchange through a licensed broker is much safer than buying an "investment" offered on social media.