SHARETIPSINFO >> Articles Directory >>Why does a company issue stocks?

 

The simplest for the question is – a company issues stocks for raising fund for the business. But there are so many other ways to get finance for a company then why does it issue stocks and let thousands others to take a part of their profit? So let us elaborately discuss the whole process of issuing stocks from both the company’s point of view and the investor’s point of view as well.

Initially when a company is started the founders create an initial capital that is called the stock or capital stock of the company. This stock is the basis on which the company can get debt from the bank and other financial institutions or issue shares. This capital stock in the business is divided into shares and the number of the shares for the stock must be declared by the company during the formation of the company. Then these shares can be issued by a publicly traded company for the general public to buy those shares. Initially each of these shares has a face value or a par value that is deduced on the basis of the number of shares and the capital stock. When a company issues shares for the first time in the market it is called the Initial Public Offering or IPO. Once the shares are issued and bought by the investors it is listed at the stock exchanges at a price that becomes the trading price of the stock and thereby the issuing company collects the funding from the market. Though the primary objective of any company for issuing stocks is to raise money from the market, it is used by the companies either to diversify the business or for further growth of the company.

But then can any company that wished to issue stocks can do it. The answer is obviously no. A company must be registered with the controlling authority of the Stock Exchanges in the country for India it is SEBI. The company has to be also registered with the stock exchanges of the country so that it can be listed and traded at these exchanges. In both the cases the organizations have certain criteria that the company has to fulfill so that they can be permitted by these authorities to issue stock and raise money from the public. Even after the company is listed and issues stock it has to maintain certain procedures otherwise the stock exchanges can always stop trading of the company.

Now there are so many other ways like debt financing that can be used by these companies to raise funds where they won’t have to share their profits with the share holders. This can be done by issuing bonds in the market. But if a company issues bonds instead of shares it has to pay yearly interest to the investors and moreover it has to recover the debt before it can actually liquidate the assets of the company.

From the point of view of the investors it is the hope of the future growth of the company that prompts them to invest in the stocks. When the stocks appreciate in the market the investors get their profit from investment. It is basically the demand and supply ratio that determine the price of the stocks at the stock market. If there are more prospective buyers than the willing sellers in the market the price of the stock will increase. On the other hand if there are more sellers than the number of buyers in the market the price of the stock will reduce. The demand of the stock is created in anticipation of the good performance of the company and the future potential of the company. Of course other factors like the overall economic scenario of the country, market trend, trend of the sector all these also play a vital part in forming the demand of the stock and determining the price of the stock.

While issuing the share the company clarifies different categories of shares and on the basis of that the right and responsibility of the share holders is determined. On general terms as a share holder you will be owner of every asset of the company whether physical or intellectual for example lands and patents, at least theoretically. You will also have the voting rights to select the management of the company in the annual meeting of the company.

 

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