A company's primary reason to issue stock is to raise capital. The capital is typically used to pay down debt or to further expand the business. The company might issue stock through an initial public offering (IPO) or through a subsequent offering.
An initial public offering (IPO) is when a private company goes public and its stock is first offered to investors. A subsequent offering is when a company decides to raise capital by issuing more shares following the IPO.
Why do companies issue stock through an IPO?
Companies will issue stock through an IPO in order to capital to continue to grow the business. An IPO requires the company to assess investor interest, and it usually includes a roadshow, dedicated to presenting the business to institutional investors.
The goal is to gather enough investor interest in the business in order for a successful initial public offering. It is also important for the IPO price to be higher.
Why do companies use a subsequent offering?
Companies will often resort to a subsequent offering as an alternative to issuing debt. When the company is not able to borrow at an attractive rate, management may choose to raise additional capital through a subsequent offering.
The capital might be used to pay down debt or to further grow the business. Depending on the specific situation of the company.
When a company issues stock through a subsequent offering, its stock price tends to go lower. This is because the number of outstanding shares of the company increases, diluting current shareholders.
Issuing stock through a subsequent offering might also be a last resort option for some companies that are deeply troubled. Since they are not able to borrow or issue bonds they might be forced to issue stock in order to raise capital.
What is the capital raised through issuing stock used for?
The capital raised through the issuance of stock is typically used to continue to grow the business. However, this notion is associated with IPOs and some subsequent offerings. Companies that are going through a troubled period might be forced to issue stock, usually through a subsequent offering in order to pay down debt and strengthen their balance sheets.
Why troubled companies do not issue stock through an IPO?
An IPO requires the company to issue a considerable amount of stock, or ownership of the business. There are also costs associated with an initial public offering.
In order for an IPO to be successful, there has to be institutional interest in investing in the stock. The interest from investors is also what allows the promoters of the IPO to price the stock at attractive levels.
A troubled company will not be able to gather investor interest. Therefore it will not be able to issue stock through an IPO.
Why some companies do not issue any stock?
Some companies that have creditworthiness are able to borrow at very attractive terms. Thus, they are not dependent on issuing stock in order to raise capital.
In fact, issuing stock would dilute the current shareholders which in turn would force the stock to trade at lower levels, since there are now more shares of the company. The market tends to receive subsequent offering news badly, which usually forces shareholders to sell.