Investment Education Center > Investing 101

Why Do Companies Issue Stock?

Companies can decide to make the transition from the private market to the public market for several reasons. When a company "goes public," its first offering of stock is called an Initial Public Offering or IPO. Once a company is public it can also decide to issue more stock.

Stocks consist of two markets: primary and secondary. The primary market, also known as the new-issues market, allows new or growing businesses to sell stock to raise money. Investors in IPOs can later sell the new stocks in the secondary market, allowing buyers and sellers to trade stocks quickly and effectively. The New York Stock Exchange (NYSE) and Nasdaq are the major secondary markets in the United States. On these exchanges, investors trade stocks that they already own, and the company which initially issued new stock doesn't receive any additional money from this activity.

When a company issues stock it raises money that it can use to expand its business. For instance, a company might build a new factory or hire additional employees with this money. As a result, the business becomes more profitable.

The reasons that a company might want to raise money by issuing stock are:

? To develop new products ? To buy more advanced equipment ? To pay for new buildings and inventories ? To hire more employees ? To provide for a merger or acquisition ? To decrease debt ? To give company owners greater flexibility ? To place a value on the company

An investment banker usually manages the offering of a company's shares and serves as the link between companies and possible investors.

When a company goes public, it also takes on several new responsibilities and must comply with the federal and state regulations for publicly traded companies. In addition, a lot of company information, such as earnings, must be publicly available and a great deal of effort is expended keeping investors informed about the company. The company must also pay independent underwriters, attorneys, and accountants.

Investing Glossary

Word of the Day

"price-earnings relative"

The relative amount found by dividing a stock's price-earnings ratio by that of the market as given by a widespread market yardstick such as the S&P 500 or the Value Line index (This relative suggests to the investor whether his investment's price is reasonable compared to the market. Also can be used for historical comparison with P/E relatives of recent years.) continue reading

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