What is a New Issue
A new issue is a reference to a security that has been registered, issued, and is being sold on a market to the public for the first time. The term does not necessarily refer to newly issued stocks, although initial public offerings (IPOs) are the most commonly known new issues. Securities that can be newly issued include both debt and equity.
BREAKING DOWN New Issue
A new issue ties into the fact that capital is critical for business growth. Companies can raise capital through debt or equity. Debt is issued in the form of bonds, and equity is issued in the form of shares. When a company issues new bonds or common stock, it is referred to as a new issue.
New Issue Hype
New issues are sometimes referred to as primary shares or new offerings. Many investors buy new issues because they often experience tremendous demand and, as a result, see rapid price increases. Other investors do not believe new issues warrant the hype they receive and choose to watch from the sidelines. An investor who purchases a new issue should be aware of all the risks associated with investing in a product that has only been available to the public for a short time. New issues often prove to be rather volatile and unpredictable. Share values may surge up or down on the day of issue.
The most common type of new issue is referred to as an initial public offering. This is the first sale of company shares. In other words, there is no market price for shares before this offering. Subsequent new issues may come after the IPO, but there can only be one IPO.
Recording New Issues
Companies record a new issue of stock on the balance sheet as paid-in capital. Paid-in capital equals par value plus additional paid-in capital, where additional paid-in capital is the amount the stock was sold for above par value.
For example, assume the board of directors for company A authorizes 5 million shares of common stock at a par value of $0.01. The company sells 1 million for $10 each. To record the receipt of $10 million in cash, the company must record three different transactions.
First, the company must debit the cash account for $10 million, followed by a credit of $10,000 to paid-in capital and the remaining to additional paid-in capital. Both paid-in capital and additional paid-in capital are line items in the stockholders' equity section of the balance sheet, which can be found in the company annual report or 10K.