What is 'equity financing'?

Equity financing refers specifically to the process of raising funds by selling shares of stock in a company. When a company seeks to gather capital through equity financing, it does so by offering ownership stakes to investors in the form of shares. This method allows the company to generate capital without the obligation to repay it, as the investors are essentially buying a portion of ownership in the company.

When a business sells equity, it benefits from the influx of cash that can be used for various purposes such as expanding operations, funding new projects, or improving infrastructure. Additionally, equity financing can also enhance the company's profile in the market, as having public shareholders can improve credibility and visibility.

In contrast, the other methods listed involve different types of financing. Obtaining loans from financial institutions represents debt financing, where the company is obligated to repay the borrowed amount with interest. Utilizing retained earnings involves reinvesting profits back into the company rather than raising new capital from external sources. Lastly, issuing bonds is another form of debt financing, where the company borrows money from investors, promising to pay it back at a later date with interest. Each of these methods plays a unique role in a company's overall financial strategy, but equity financing distinctly emphasizes ownership share sales.