What Are the Benefits of Issuing Common Stock?

When a company issues common stock, it is called either an initial public offering or a secondary offering. The initial public stock offering, or IPO, gives existing shareholders liquidity by publicly trading the stock on a public stock exchange and gives the company an influx of cash. When a company issues stock after the initial public offerings, this is called a secondary offering. There are many reasons companies issue common stock.

Pay Down Debt

If the company is carrying a heavy debt load as a result of expanding the business, a responsible corporate decision would be to pay down the debt using corporate cash flow or the proceeds gained from issuing stock. With an enhanced balance sheet, the company can entertain into more ambitious expansion plans.

Cash on Hand

If a company believes that its current stock price is strong in the face of a possibly declining outlook for its products, it might seek to issue stock to have ample cash for the downturn, buy back stock at lower prices if there is a decline in stock prices or have funds available to take strategic advantage of competitor's weakness during a downturn. Issuing stock can be part of an opportunistic business strategy.

Acquisitions

Stock is often issued once a company has decided that a related business has better growth prospects than the business the company is currently engaged in or can be melded into the current product line. This is how Standard & Poor 500 companies often grow.

Using current cash flow and a stock issuance, a company will buy a smaller company in a field it wishes to enter. This regularly happens to small-cap companies that have important products but need either capital or to be acquired by a larger company to grow sales.

Credit Ratings

Stocks that are publicly traded have common stock and bond ratings. These ratings are enhanced if they are public companies that can come to the public markets and raise cash to pay down debt or raise capital. As a result, rating agencies treat public companies that have enhanced liquidity as better risks than companies that must rely on private placements or bank lines of credit, so the cost of loans go down for companies that issue stock.

Considerations

If the company has outstanding prospects, it may stagger the sale of stock over time, issuing stock at a higher and higher price each time. However, the corporate treasurer must make certain that the stock issuance is absolutely necessary so that stock is not sold too cheaply and existing investors lose much of the benefit of a stock's subsequent rise.

References

• The Costs of Stock Issuance
• What Is Common Stock

Resources

• Common Stock vs. Preferred Stock