When most people think about a company raising capital, they think about a private company going public - selling an initial public offering (IPO) of stock. An IPO can indeed be an effective means of raising capital for corporate ventures, and it has many upsides:




Money to grow the business: With an infusion of cash derived from the sale of stock, the company may grow its business without having to borrow from traditional sources, and it will thus avoid paying the interest required to service debt. This "free" cash spent on growth initiatives can result in a better bottom line. New capital may be spent on marketing and advertising, hiring more experienced personnel who require lucrative compensation packages, research and development of new products and/or services, renovation of physical plants, new construction and dozens of other programs to expand the business and improve profitability.





Money for shareholders and others: With more cash in the company coffers, additional compensation may be offered to investors, stakeholders, founders and owners, partners, senior management and employees enrolled in stock ownership plans.





Company stock and stock options may be used in an effective incentive program. In recruiting talented senior management personnel, stock and options are an attractive inducement. For employees, a performance-based program of stock and/or option bonuses is an effective means of increasing productivity and managerial successes. Stocks and/or options may also be used in other forms of compensation, as well.





Other benefits of going public: Once the company has gone public, additional equities may be easily sold to raise capital. A publicly-traded company with stock that has performed successfully will usually find it easier to borrow money, and at a more favorable rate, when additional capital is needed.





A publicly-traded company may also have more leverage in negotiating with vendors, and it may be more attractive to customers. This is a critical aspect of business; a company that keeps vendor costs low may post better profit margins. Customers usually have a better perception of companies with a presence on a major stock exchange, another advantage over privately-held companies. This favorable opinion is largely due to the audit and financial statement scrutiny that public companies have to undergo on a regular basis.





A publicly-traded company conveys a positive image (if business goes well) and attracts high-quality personnel at all levels, including senior management. Such companies are growth-oriented; they answer to a board of directors and shareholders who continually demand increased profitability, and are quick to rectify management problems and replace poorly performing senior executives.





But before undertaking the complex, expensive and time-consuming preparations and incurring the risks involved, the upside and downside of this critical move must be fully assessed. Although there are numerous benefits to being a public company, this prestige comes with an increased amount of restrictions and requirements. (Learn more in The Murky Waters Of The IPO Market and The Biggest IPO Flops.)





In this section of our corporate finance walkthrough, we'll first explore how a company goes public. We'll then look at lesser-known, less-glamorous methods of raising capital, including new equity securities (secondary offerings) and rights offerings. We'll also look at how dilution impacts existing shareholders, and we'll touch on the issuance of long-term debt for financing.





Public Issue And Cash Offer

Related Articles
  1. Insurance

    The Ups And Downs Of Initial Public Offerings

    Initial public offerings aren't the best option for every company. Consider these factors before "going public."
  2. Investing

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  3. Investing

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  4. Investing

    Valuing Private Companies

    You may be familiar with publicly-traded companies, but how much do you know about privately-held firms?
  5. Investing

    The Pros And Cons Of A Company Going Public

    Small companies looking for growth often use an initial public offering to raise capital. But going public brings both advantages and disadvantages.
  6. Trading

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  7. Managing Wealth

    IPO vs. Staying Private: What's Best for Your Biz?

    Taking your company public or staying private? Doing an IPO is costly and time-consuming; it also means you now have stockholders to answer to.
  8. Investing

    Advantages of Public Vs. Private Companies

    A privately held company is owned by its founder, management or a group of private investors.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center