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. Insights

    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

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  3. Investing

    Why Public Companies Go Private

    Privatization can give management more time to make money for investors, but at what cost?
  4. Managing Wealth

    How to sell stock in your company

    Read about options and important steps to consider when you're selling, even a small part of your business.
  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. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  7. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  8. Insights

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  9. Managing Wealth

    A Guide To CEO Compensation

    Learn everything you need to know, with our guide to CEO compensation.
Frequently Asked Questions
  1. What is a trade deficit and what effect will it have on the stock market?

    Learn what is a trade deficit is, also known as net exports, and what effect they have on the stock market.
  2. What are soft dollars?

    The term 'soft dollars' refers to mutual funds making in-kind payments to their service providers; for instance, by passing ...
  3. How often do exchange rates fluctuate?

    Learn how exchange rates fluctuate. Exchange rates float freely against one another, which means they are in constant fluctuation. ...
  4. What is the formula for calculating earnings per share?

    Learn how to calculate earnings per share and why it's an important gauge in determining a stock’s value and a company's ...
Trading Center