What Is the Purpose of a Company Issuing Stocks?
Original post by Dennis Hartman of Demand Media
Stock market transactions pose risks for investors even when they are quick and easy to make. However, behind every stock market transaction is a company with its ownership and future at stake. Not all businesses issue stocks, and those that do must choose the right time to invite the public to invest. Companies can choose to issue stock for a number of reasons, all of which have to do with the long-term success of the enterprise.
Among the major reasons that companies issue stock is to avoid taking on debt. Loans and stock IPOs, or initial public offerings, are two ways of raising capital, which businesses need to function. However, while loans represent long-term debt and the cost of interest, issuing stock results in a quick influx of cash as new shareholders become partial owners. In essence, issuing stock is a way for a company's owners to sell their ownership control to the general public. In return, they receive money that may eliminate the need to borrow funds.
Issuing stock can be a means to funding expansion, which is why many businesses select strategic times to start selling stock. Small businesses aren't worth enough to make issuing stock a very profitable choice, but once a business grows and establishes itself in a market, it may become attractive to investors who see the potential for future growth. Issuing stock ahead of plans to expand overseas or add new products can excite investors and provide useful places to spend the money that an IPO generates.
Improving Ability to Borrow
Just as issuing stock can allow a business to avoid borrowing money, it can also facilitate future borrowing. Because they take out fewer loans due to the money they receive by issuing stock, and have greater overall financial stability, public companies have greater chances of receiving loans at low interest rates. This makes it easier to borrow money for any purpose, whether it's to make up for a cash flow gap, take advantage of an investment opportunity or eliminate other, more expensive debt.
Some of the purposes for issuing stocks may be intangible. Listing stock on a well-known exchange, such as the New York Stock Exchange, is a prestigious step for a growing business. It will not only increase the company's visibility in the market, but also mark an achievement that smaller competitors may not be able to, since exchanges have strict regulations about which companies can trade their stocks there. Issuing stock may also be a business founder's way of passing on control to a group of people (the new shareholders and board of directors) and taking a different position within the company.
- California State University, Northridge; Small Business Finance and IPOs; James P. Dow, Jr.; 2009
- The University of Chicago Booth School of Business; Why do Companies Go Public?; Marco Pagano, Fabio Panetta and Luigi Zingales; January 1997
About the Author
Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.