The Corporation

A company which raises money by selling shares is usually organized as a corporation. This financial structure protects the initial developers and investors from later financial claims that might be made. If the company fails, the creditors usually have the right to take the company's assets as payment for the money they put into shares. In a corporation, the financial risks for owners and shareholders are limited to the amount of money they have invested - no more.

The corporation forms a board of directors to oversee the company's business affairs. When the company decides to sell stocks, it hires an investment banker from an investment firm to assist with this process of stock offering. The investment firm studies the company and the current market to determine a fair price for the stock, then buys all the stock from the corporation for resale to the public. This process is called underwriting. Before stock can be sold, the corporation must file a registration statement with the Securities and Exchange Commission (SEC) disclosing the company's financial condition. This data is usually presented in a published prospectus which is made available to prospective investors. Companies let investors know about their stock offerings by placing ads (called tombstones) in the financial press, such as The Wall Street Journal, The New York Times, and Barron's.

The corporation board sets company policy and elects a president and other officers to run the company on a day-to-day basis. Most boards meet once a quarter to hear reports from the management team concerning the company's financial status and its strategic plans. Once a year the corporation holds an annual meeting which all stockholders can attend. At this meeting the management team gives its annual report to shareholders. Stockholders are sometimes required to vote during these annual meetings on matters important to the corporation.

Most corporations are controlled by a single person or group who hold a large number of the company's shares. They effectively determine who will sit on the board, what the company policy and strategy will be, and make certain they receive the largest share of the company's profits. Nearly half the total value of the stock market is held by the wealthiest 1% of the population.