Stocks are financial instruments which represent ownership of a company. Ownership of a company can be determined by dividing the number of shares you own over the total number of outstanding shares in the company. Why do companies issue stock? Companies do this in order to raise their capital. Smaller companies or companies just starting out usually have a deficiency in capital before long and decide to open their shares to the public so they can acquire more money.
Issuing stock is a move which allows the company to raise capital while not really having to damage their funds further. A stock issue means that an owner buys into the company while receiving only the promise of a portion of whatever future profit the company makes. The potential gain is very appealing to a lot of people and investors are always on the lookout for possible profit so a lot of them buy stocks from the company which accumulates steadily into a considerable capital.
Those who can issue stock are the board directors of the company. Issuing stock is a matter of deciding how much each stock is worth and how much of it will be issued to an owner. When companies decide to issue stock, this means that they want to go public. How does a company go public? The first thing companies do is get an underwriter for the IPO or initial public offering. The underwriter is usually a large bank which has entered into an agreement with the company. The company’s value will be assessed and deciding on the share division will go from there as will other legalities.
What are the Advantages to Issuing Stock?
There are several advantages of issuing stock. One is that in doing so, capital for the company won’t be much of a problem. The burden of finances won’t be as heavy because all of your shareholders will be taking up a part of the company and contributing to it. Decisions on who can issue stock will, of course, remain with the board though shareholders usually have a little bit of voting power as well.
Another advantage is that by issuing stock, the company avoids the alternative of borrowing money. It’s always better to raise capital by selling than by being in debt. Debt usually means that a company isn’t doing very well. Since the shareholders pay for the stock but don’t receive principal payment from the company in return, this gives the company room to breathe when it comes to worrying about expectant pockets. They can use the capital and supplement the business and all the risk will be on the shareholder’s part.
How to Issue Stock
Now that we know the answers to why a company issues stock and who can issue stock, the next thing to do is answer this question: How to Issue Stock? As mentioned before, issuing stock is first a matter of the board deciding just how much stock they really want to issue. Then it would be providing hard copies of the stock certificates to the shareholders. Good printers are usually hired by companies as these certificates are binding proof of ownership and should be treated seriously.
Last is making sure that a buyout agreement is in place with the shareholder so that all the legal details of the stock are ironed out. The buyout agreement will cover all sorts of issues involved with stock ownership including what happens if a shareholder dies and how a shareholder can buy out another owner’s shares. Issuing stock isn’t a very complicated matter as long as those in power aren’t incompetent buffoons.