Why Does a Company Issue Stock?

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Stocks represent shares of ownership in a corporation. Companies typically issue stock to raise money for growth and development, to reduce reliance on debt financing, and to enable owners to spread financial risk.

Growth and Development

New products, new facilities, expanded operations and advanced equipment are among the factors that drive companies to raise money. Issuing stock is one way to raise capital from investors. To grow quickly in any of these areas, business leaders often need more money to work with than the company generates through profit.

New facilities and new products often require significant investments in assets. Expanded operations includes such activities as bringing on additional workers and engaging in new production processes or business activities. Advanced equipment helps a manufacturer operate more efficiently, or a reseller acquire and market goods more effectively.

Reduce Debt Reliance

Issuing stock is contrasted with taking on debt when comparing financing options. To raise new money, business operators might choose equity investment for financing to avoid debt repayment obligations, improve cash flow and bring in additional experts. In some cases, companies issue stock because their current debt situation is overwhelming or stifling business growth. The new funds are used to pay off existing debt, which reduces interest expenses and cash flow problems.

Spread Financial Risk

Sharing financial risks of business operation is a primary reason business owners initially choose to issue stock. Some business owners also view going public as a way to cash out on their ownership. Private business owners who build up the worth of their company can get return on their financial and time investments by selling portions of the business to shareholders.

Increased Public Profile

Another intangible benefit of becoming a public company is the potential for an increased business presence. Entrepreneur notes that public companies usually have a higher profile and added prestige relative to private companies. Broadcast and print media programs discuss news of public companies and sometimes interview business executives. These opportunities for increased public exposure could lead to broader market awareness, more customers and more revenue.

Warning

  • Issuing stock as part of going public isn't without its drawbacks. For example, it comes with requirements to file financial documents as part of ongoing operational transparency.

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