Issuing additional stock is often cited as an effective way for a company to expand or access additional funding. It involves a company selling additional shares of stock to the public or to financial institutions. The new stock can be used to raise funds for a variety of purposes, such as investing in new technology, marketing, making acquisitions, or expanding operations. Further, issuing new stock can also increase the size and liquidity of a company’s existing shares by expanding the total available on the public markets.
When companies issue additional stock, funds are generated directly from the sale of the newly issued shares due to the difference between the share price at issuance and the price offered by the investors. However, the cost of issuing additional stock can be a mandated cash outlay. For example, a company must pay fee to an intermediary to manage the sale of new shares as well as cover other associated costs
Various experts have provided perspectives on whether a company should issue more stock. According to a finance professor, issuing additional stock is a great way for a company to raise capital, especially a startup with limited resources. Another expert suggested that selling additional stock is an attractive option for companies because the sale does not require the company to accrue high interest expenses if the company chooses to borrow the funds from a lender.
From an investor perspective, however, additional stock issuance can be seen as a negative signal. For example, if investors perceive that management is issuing additional shares because there is no other alternative or if the sale is diluting shareholders’ equity by reducing the share price, investors may see the issuance of additional stock as an unfavorable signal. Additionally, issuing additional stock could potentially spawn stock dilution.
Moreover, additional stock issuance is also subject to certain regulations and may be restricted at times by applicable laws. For example, if a company has a strict cash flow policy, it might be forbidden to sell additional shares when the cash flow drops below a certain level. Additionally, the stock exchange the company is listed on may also place periodic restrictions on issuing additional shares.
Related Benefits of Issuing More Stock
When a company can issue additional stock, there are several related benefits it can experience. For instance, if the new stock is offered at a higher price than the current market price, it can result in a higher overall market capitalization of the company and also a bump in the company’s stock price. The market capitalization is the total value of a company’s outstanding shares, and it can potentially lead to a higher market share of the company’s stock.
In addition, issuing additional shares can offer greater liquidity, which refers to the ease with which stock is bought and sold in the marketplace. This is beneficial to investors because it reduces the risk of the stock becoming illiquid and unable to be easily sold at a fair price, thus reducing the company’s attractiveness to potential investors.
Another benefit is that issuing additional stock can help a company move up the price chain if the initial offering prices of the shares is priced higher than the current market price. This can in turn attract institutional investors, who can potentially offer a greater level of capital and stability to the company.
Moreover, additional stock issuance can help a company increase its visibility in the marketplace. Generally, the attention of potential investors, analysts, customers, and other stakeholders increases when the company launches a public stock offering. This enhances the company’s image and value in the eyes of the investing world and can make it easier for the company to raise additional capital.
Conclusion
When considering issuing additional stock, it is important to consider the implications and costs associated. Companies should always consider the various options available to them, such as debt financing or equity financing, in order to determine the best course of action. Undertaking due diligence on issuing additional stock can help companies make a more informed decision.
