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We'll start on the next page with the reasons why a restaurant owner would issue stock to the public. For the remainder of this article, we'll use a hypothetical pizza business to help explain the basic principles behind issuing and buying stock. Perhaps the best way to explain how stocks and the stock market work is to use an example. If the company fails, the founders don't lose all of their money they lose several thousand smaller chunks of other people's money. Even better, equity financing distributes the risk of doing business among a large pool of investors (stockholders). There is no interest to pay and no requirement to even pay the money back at all. By selling stock, however, the company gets money with fewer strings attached. The disadvantage of borrowing money is that the company has to pay back the loan with interest.
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Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money (a process known as debt financing) or sell stock (also known as equity financing). Why would a company want to share its assets and earnings with the general public? Because it needs the money, of course. Assets include everything the company owns (buildings, equipment, trademarks), and earnings are all of the money the company brings in from selling its products and services. When you buy a share of stock, you're entitled to a small fraction of the assets and earnings of that company. A share of stock is literally a share in the ownership of a company. The stock market can be intimidating, but a little information can help ease your fears.