Final answer:
A company issues common stock to investors primarily in cash through an IPO or a secondary offering. The firm receives financial capital for expansion without promising a specific rate of return, and decision-making is transferred to the board of directors and shareholders. Issuing stock is advantageous as it doesn't commit the firm to scheduled interest payments like loans or bonds.
Step-by-step explanation:
When a company chooses to issue common stock to investors, it does so by selling off ownership of the company to the public. This can be done through an initial public offering (IPO), where the company sells its stock for the first time to the public, including individuals, mutual funds, insurance companies, and pension funds. Following the IPO, the company can issue additional stock either as treasury stock or through a secondary offering. The capital raised from these stock sales is typically in cash, which provides the firm with funds to repay early-stage investors, such as angel investors and venture capital firms, and to invest in expanding its operations.
Regarding the rate of return, the company does not promise a specific rate of return when it sells stock. Investors' gains come from stock price appreciation and potential dividends, and these are determined by the company's performance and decisions made by the board of directors. The board of directors, elected by the shareholders, makes decisions in a company owned by a large number of shareholders. They decide on matters such as dividend payouts or reinvestment strategies.
Issuing common stock has advantages over other forms of raising capital, such as borrowing from a bank or issuing bonds, as it does not involve a commitment to scheduled interest payments. However, in doing so, the company becomes responsible to its shareholders and a board of directors, potentially diluting the control of the original owners.