Companies do not issue stock for no reason, issuance of shares allows them to do several things within the company. When a companies start making shares available to the public their start with the IPO, which is the Initial Public offering.
That’s where their one time payment comes from. The IPO is what companies get paid for, they don’t have any interest from the tradings of the stock.
They sell sell their IPO and receive their money from the securities market. They are not receiving or losing money from the daily tradings as in our case.
But that does not mean they don’t care about their stock. Some of the management members are often shareholders, which gives them a great interest in the company’s stock.
They will always want to see their stock doing well because it also helps them when they are in need for credits. Allowing the public to buy shares from a company is allowing them to be part of such company.
When they buy shares they technically own a small piece of that company. But companies have many reasons for which they go public.
Because no owner would want to share ownership unless there’s a huge gain to be received from that. Below are some of the reasons that force owners to go public, read on to find out…
To Raise Money For The Company
Issuing stock to the public enables companies to raise money for expansion. For instance, some companies use their stock money to build new buildings, hire new employees, and to buy new equipment.
As you can see, this money can open an additional store or branch of a company. By expanding the company they have many more opportunities to make lots more money than they would make as a privately owned company.
They will have more cash flows, more customers, and even a better reputation in the country in which they are operating.
To Develop New Products
Some companies go public in order to have money for new productions. Creating new products requires a good amount of cash in hand, not every company is fortunate enough to operate without others’ help.
Companies can either choose to borrow money, such as loans, bonds, etc. But they would have some type of interest associated with them.
Therefore making their stock or shares available to the public is the best way to raise money for their needs.
To Pay Off Their Debts
Companies that have already borrowed or took loans use their stock money to pay back their creditors. New companies often start off in business with a lot of debts.
when they go public and start selling shares it gives them a good push financially.
For Financial Health Barometer
Before a bank qualifies a company for a loan the first thing that gets a looked at is their stock’s performance.
If the company’s stock is not trading at a good level according to the bank, the chance of getting the loan can be significantly reduced.
That’s why companies care for their stock’s performance although they are not making money on the tradings. Their performance is a tool that can either help or hurt them when negotiating with creditors.
In order not to get hurt by their stock’s performance they have to ensure that they are trading at a decent price and have good activities going on.
Going public also reduces a company cost of capital as well as interest rates when negotiating with a bank. Another good aspect of it that can encourage a company to go public is the fact that this company will be listed on a stock exchange market.
Being listed on a major stock exchange comes with many opportunities. Listed below are some of the opportunities.
- Market exposure
- Advertising via market listings
- potential for increase capitalization
- Improved branch equity
I hope this article has enlighten you on why companies choose to go public by offering shares. They do not do it for no reason or just to allow us to have stock to trade every day, but they have several benefits from going out to the public.