Why do companies issue shares?

The main motto of companies behind share issuance is to raise capital. Companies need money for their operations and expansion and equity shares help them with the same.

On the other hand, the investor who buys these shares gets part ownership in the company. In case of equity shares the investor also enjoys a voting right in the company.

This method of raising capital via equity shares is known as equity financing. The company can also opt for bank loans or issue bonds for raising capital. These methods are known as debt financing.

However, when companies opt for debt financing, there is always an interest associated with the capital, whereas in case of equity financing there is no such interest and thus, companies have more freedom to utilize the capital. Also, the money raise in debt financing needs to be paid back along with the interest, whereas the money raised through equity financing does not needs to be paid back.

Companies issue stocks for various reasons, which play a very important role in the long-term vision of the company. Some of the main reasons include:

•        To avoid Debt – The primary reason for issuing shares is to avoid debt. Stocks help companies in raising capital without taking any burden in the form of debt.

•        Expansion of Funding – Companies often select strategic time for selling stocks. This is because sale of stocks can prove out to be a measure of funding expansion.
•        To improve borrowing ability – Issuing stocks can prevent borrowing money and also help in facilitating future borrowings. This is because companies have lower debts by issuing stocks which leads to better overall financial stability.

•        Intangible Purposes – There can be certain intangible purposes also for issuing stocks. For example, listing of a company on the NSE is surely a prestigious step and will be a great achievement when compared to its competitors.