The Advantages of Issuing Shares

A corporation can raise capital by selling shares, known as equity financing, taking on debt, known as debt financing, or earning additional revenue. The strategy selected by a corporation to raise capital will often depend on how quickly the corporation requires the capital. Issuing new shares is an option used by corporations to raise capital when time is not of the essence.

Advantages

If a corporation does not require new capital, it will usually not opt to sell shares because issuing new shares results in a reduction of control of the company to the new investors. The primary reason for a corporation to issue shares is to raise capital. A corporation can also typically raise more capital by issuing shares than it can through debt financing. Equity financing is not debt and does not require the corporation to pay either principal or interest payments to creditors.

Advantages for Stockholders

The primary reason most investors purchase stock is to make money. When you purchase a share of a corporation's stock, you become part-owner of that corporation. Depending on what type of share you purchased, you may receive a portion of the company's retained earnings as a dividend payment based on the number of shares you own. Investors want the corporation to use the capital raised through the sale of shares to generate profits. This, in turn, will increase the value of your shares and the potential dividend payment made by the corporation.

Growth

Corporations commonly issue shares to support current and future growth. In many cases, a corporation will use capital generated through the sale of shares to expand the business. This expansion can benefit both the corporation and new shareholders by increasing the overall profits of the corporation.

Equity vs. Debt

When raising capital, a corporation must choose between issuing shares and acquiring debt. When a corporation sells equity, the corporation must give away a proportional share of future profits to the new investors. The investors, however, assume the same risk as the corporation, meaning the corporation does not have to pay the investors directly back for the shares purchased. On the other hand, if a corporation uses debt to finance the business, the corporation will have to pay back both principal and interest to investors. Debt does not represent an ownership interest in a corporation.

References

• "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
• "Business Principles and Management"; James L. Burrow and Brad Kleindl and Kenneth E. Everard; 2007