Suppose you owned a music label called DiscMania. Business is going well, and you want to expand. You could take out a bank loan. But you'd have to repay it in a short time. Instead, you could sell company stock, which basically means you sell part of the ownership of DiscMania. This is what many companies do when they want to grow. They offer stock (sell it) to the public to raise the money they need. This means they become a publicly owned company.

Why A Company Offers Stock
Let's say you need $5 million to sign several new bands and purchase two recording studios. You would contact an investment banking firm, which would analyze DiscMania's business, help set a stock price and find investors who are willing to buy your stock. If the price of the stock were $5 per share, you'd need to sell one million shares of stock to raise the $5 million you need.

Next, the investment banking firm would arrange an "initial public offering" (IPO) of your stock. They would provide potential investors with a prospectus that includes information about the stock and your company. They would also tell people how well DiscMania has performed and why the company might perform well in the future.

After the initial public offering, if DiscMania meets certain requirements (such as a certain level of company income and the number of shares of stock available) and pays certain fees, the stock can be listed on an exchange, like the New York Stock Exchange. This makes it easier for shareholders to buy and sell shares of stock.

Who Buys the Stock?
The stockholders of DiscMania could be individuals, or they could be other companies such as banks, insurance companies or even mutual funds. If DiscMania earns money (or income), it may decide to pass portion of the income it receives, called dividends, to its stockholders. Stockholders have two options when they receive dividends. They may request the dividend in cash or they may reinvest the amount and buy more stock in DiscMania.

If DiscMania stock is owned by a mutual fund, then the fund usually passes a portion of the dividends it receives to fund shareholders. While the fund owns the stock, an increase in the stock's price usually shows up as a rise in the fund's share price. If the fund sells the stock, it usually passes along any (net) price increases as capital gains.

Of course, there may be some years when CD sales are slow and DiscMania loses money. If that happens, DiscMania's stock price could fall. Sometimes a stock price will rise or fall for reasons having nothing to do with the company directly - for example, when prices of many other stocks being sold on the market rise or fall in response to an economic or political event (such as a presidential election).

A Stockholders' Rights
Stockholders have the right to know how a company earned and spent money and the right to elect a board of directors. (The board of directors helps ensure that company management makes decisions keeping shareholder interests in mind.) In return for these rights, and sometimes for a part of a company's profits, a company gets to use stockholders' money to help the company grow. By letting stockholders share in its success, DiscMania could attract new investors, because some investors are interested in stocks that return dividends.