What does equity financing involve?

Equity financing involves raising capital through the sale of shares, which means that a company generates funds by selling ownership interests in the form of stock. When investors purchase shares, they are essentially buying a piece of the company, which allows the business to obtain the necessary funds for various operations like expansion, research and development, or increasing working capital.

Unlike debt financing, which requires repayment with interest, equity financing does not impose a financial burden from the start, as it doesn't require fixed paybacks. Instead, investors share in the risk and potential rewards of the company's success. If the company does well, the value of shares may increase, providing a return on investment for shareholders through capital gains or dividends.

Understanding the nuances of equity financing is crucial for a company’s financial strategy, as it affects ownership dilution and the control that original owners maintain over the company.