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Why do companies issue stock
Going public is a surefire sign that a company has done well for itself in the market. However, issuing stock also means that a company’s transactions may become public information and that it is subject to additional laws. Issuing stock also essentially puts the ownership of the company in the hands of the stockholders. So why do companies issue stock? We investigate.
To raise capital
The single biggest reason why companies issue stock is because it needs to raise capital. When a business has become successful, it might want to expand. Expanding operations means that a business needs to order more supplies, hire more employees and even expand its premises. All of this costs money and a company may not always have the resources to pay for all these expenses for an extended period of time using its existing funds. By issuing stock, the company is able to ask members of the public to invest its money into the business in return for a fraction of the ownership of the company.
To avoid paying periodical interest
If a business doesn’t issue stock, it may need to obtain a loan to expand its operations. However, getting a loan means that the business would be required to make interest payments periodically. For a business, this is usually not a profitable position to be in as these interests can eat into the actual profits of the company. However, by issuing stock, a company essentially asks members of the public to become fractional owners of the company and as such no interest payment is due to them. Since stockholders have a share in the company’s profits as well as losses, raising money through the issue of stock is much more profitable for a business than obtaining a loan from a creditor.