Understanding Common Stock Issuance

Explanation:

Buffy Inc., issuing shares of common stock to investors in exchange for cash contributions is a common financial transaction in businesses. When a company issues stock like this, unlike with issuing bonds or borrowing money, they are not obligated to make consistent interest payments. This can be advantageous for a small company that may be earning little or no profits and wishes to reinvest in the company's growth.

However, the company does need to understand that issuing stock means the investors will expect a rate of return. This can be in the form of a direct payment to its shareholders, also known as a dividend, or a financial investor may purchase the stock and sell it at a higher price, resulting in a capital gain.