Key Takeaways

  • Companies issue stock to raise capital without incurring debt.
  • Issued shares represent ownership and influence over corporate decisions.
  • Stock issuance helps finance growth, pay off debt, and fund new initiatives.
  • Stocks come in different types—common and preferred—with varying rights.
  • Secondary markets allow shares to be traded after issuance, increasing liquidity.
  • Issued, authorized, and outstanding shares all play distinct roles in equity structure.

Why do corporations issue stock is a common question business owners ask when determining which business entity to choose from. A share of stock translates to a percentage of ownership of the company, as well as a form of claim to a portion of the company's assets and earnings. The more stock you own, the greater your ownership stake in that company. Though technically stockholders to do not own companies, they own shares of the company's stock.

Shareholder Perks

A corporation is has the same rights and responsibilities as an individual would have. Corporations must:

  • File taxes
  • Borrow money
  • Own property
  • Be sued

Shareholders have certain entitlements when they own shares in a company. Shareholders will:

  • Receive voting rights at shareholder meetings based on their number of shares
  • Receive dividends when the company's profits are distributed
  • Have the ability to sell their shares to another party

Shareholders that own the majority of the shares in a corporation will enjoy increased voting power which can, in effect, give them some control of the company. Majority shareholders would have the votes to control the appointment of the company's board of directors. When a shareholder wants to buy a company, they do this by buying the majority of the company's stock. Appointment of the board of directors helps control the direction of the company as they are responsible for many of the major decisions that occur in a company.

In addition to voting rights, the more stock that you own in a company, the larger the number of shares you own the larger the portion of the company's profits you are entitled to when it comes time to distribute. This is the foundation for selling stock.

It is important to note that many stocks may not pay out dividends as some companies will reinvest the profits back into a company to continue growing it. These retained earnings will still be reflected in the value of the stock.

In startup, companies stock, also referred to as equity, is issued to help raise capital so the company can grow in exchange for a portion of some of the profits. Shares of stock can also be issued by a company once established to continue growth or be able to begin new projects. Depending on when you purchase, your stock will classify which type of shareholder you are. There are:

  • Primary shareholders who purchase stock when the company issues it
  • Secondary shareholders who buy the stock in a corporation on a secondary market.

Why Do Companies Issue Stock?

Corporations issue stock to raise money for growth and expansion. To raise money, corporations will issue stock by selling off a percentage of profits in a company. Issuing stock can also be referred to as equity financing, because the shareholder gives the company money in exchange for a portion of voting rights and profits of the company.

Becoming a shareholder in a company also comes with the risk that the company may not increase in value and you might lose the amount of money that you invested in the stock. If a company completely fails you do have the ability to claim your portions of the assets of the company after all debt has been satisfied. The banks and bondholders will have the first claim on the assets which is referred to as absolute priority.

There are two ways for you to obtain shares of stock in a corporation. You can purchase stock when the stock is first offered through the company's IPO or Initial Public Offering. This would be considered a primary market, which is when the business offers shares of stock when they are looking to start or grow a ;business. You can also purchase stock in a secondary market through stock exchanges where the stock is bought and sold.

There are many reasons that a company would issue stock to raise money. Some of the common reasons include:

  • The development of new products
  • To purchase equipment
  • To buy new buildings
  • To increase inventory
  • To expand and grow staff
  • To reduce debt
  • To prepare for a merger or acquisition
  • To improve the value of a company
  • To provide for greater flexibility

Primary vs. Secondary Market: How Stock is Traded

After initial issuance, stocks enter the secondary market, where investors trade shares among themselves. Here's the distinction:

  • Primary Market: Where shares are first sold, typically via an Initial Public Offering (IPO). The company receives the capital raised.
  • Secondary Market: Where existing shares are bought and sold on stock exchanges like the NYSE or NASDAQ. The company doesn't receive funds from these trades, but a vibrant secondary market can enhance the liquidity and perceived value of its shares.

Understanding this system is key to grasping how stock issuance fits into a company’s long-term capital strategy.

Types of Stock and Their Role in Capital Structure

When issuing stock, corporations typically choose between two main types:

  • Common Stock: Offers voting rights and potential for dividends. Common shareholders are last in line during liquidation but may benefit most from company growth.
  • Preferred Stock: Generally comes with fixed dividends and priority over common stock in asset distribution. However, it usually lacks voting rights.

Some companies may also issue classes of stock (e.g., Class A and Class B) to concentrate voting power among founders or executives while still raising capital from the public.

Key Benefits of Issuing Stock for Companies

There are several strategic advantages to issuing stock:

  • Avoiding Debt: Unlike loans or bonds, equity financing doesn't require regular interest payments or repayment of principal.
  • Flexible Capital: Funds from stock sales can be used for various business needs like hiring, infrastructure, or product development.
  • Enhanced Public Profile: Public stock offerings increase visibility and can improve credibility with investors, customers, and suppliers.
  • Liquidity for Founders and Early Investors: Public trading allows shareholders to sell their shares, offering an exit strategy or liquidity event.
  • Employee Incentives: Stock options and grants help attract and retain talent by aligning employee interests with company performance.

These factors explain why companies often prefer issuing stock over taking on debt.

Understanding Issued vs. Authorized vs. Outstanding Shares

When learning why companies issue stock, it's important to understand three key share-related terms:

  • Authorized Shares: The maximum number of shares a company is legally allowed to issue, as set in its articles of incorporation.
  • Issued Shares: The actual number of shares the company has sold to shareholders. These may include shares held by the public, institutional investors, or insiders.
  • Outstanding Shares: A subset of issued shares that are currently held by shareholders and available in the market. This excludes treasury shares that the company has repurchased.

Issued shares are critical in calculating ownership percentage, voting power, and earnings per share (EPS).

Frequently Asked Questions

  1. Why do companies issue stock instead of taking loans?
    Stock issuance allows companies to raise capital without the burden of repaying debt or paying interest, offering more financial flexibility.
  2. What happens after a company issues stock?
    After issuance, shares are traded on secondary markets. The company uses the raised funds for strategic purposes, and shareholders can buy or sell ownership.
  3. Do shareholders own the company?
    Not exactly. Shareholders own shares of stock, which represent a claim on a portion of the company’s assets and earnings—not the company itself.
  4. Can private companies issue stock?
    Yes. Private companies can issue stock to founders, employees, or private investors, though the process is different from a public offering.
  5. What’s the difference between issued and outstanding shares?
    Issued shares include all shares sold by the company, while outstanding shares exclude treasury stock (shares repurchased by the company).

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