Eiginfjármögnun

Eiginfjármögnun refers to the process by which a company finances its assets and operations through the issuance of equity. This is in contrast to debt financing, where a company borrows money that must be repaid with interest. When a company engages in eiginfjármögnun, it sells shares of ownership to investors. These investors, in turn, become shareholders and are entitled to a portion of the company's profits and assets. The primary forms of eiginfjármögnun include issuing common stock, preferred stock, and retained earnings. Common stock represents direct ownership, while preferred stock often carries specific dividend rights and priority over common stock in the event of liquidation. Retained earnings are profits that a company chooses to reinvest back into the business rather than distributing them to shareholders as dividends. This method of financing can be advantageous as it does not create a liability that needs to be repaid, and it can strengthen the company's balance sheet. However, it also dilutes the ownership stake of existing shareholders and can lead to a loss of control if a significant amount of new equity is issued. The decision to pursue eiginfjármögnun over debt financing depends on a company's financial situation, its growth prospects, and its risk tolerance.