Revealed: Why companies sell shares

Fsp Invest, 14 Nov. 2013

Tags: shares, why does a company sell shares, funding, shareholders, preference shares, listing, investing, interest payments,

Companies are always looking for ways to obtain funding for acquisitions and capital intensive projects. There are many ways a company might go about getting these funds. The company could go to the bank or it could sell shares in its business. Read on to uncover why companies sell shares…

A company looking to obtain funding could go to its bank and obtain a long-term loan, Gareth Stokes in Fear, Greed and the Stock Market explains…

But bank loans are costly. So companies need to be more creative.

Some companies will try and fund their expansion plans through the issue of corporate bonds. They can issue bonds to institutions and private investors.

But ultimately these bonds are no better than a bank loan. They’re simply another form of debt finance.

And that’s when a company looks to the capital (or equity) market to find funding. They offer up the company to financial institutions and private investors.

To put it another way, the company opts to sell shares (or part ownership in the company) to private and other investors. The company then uses the money it raises in this public offering for various capital intensive projects. And it doesn’t have to pay additional interest charges.

Shares don’t cost a company interest payments

So shares (bar preference shares) don’t cost the company any additional amount in interest payments.

Preference shares are a type of shares with a mix of equity and debt. They give the owner the same characteristics of an ordinary share (except voting rights), but carry a ‘guaranteed’ percentage dividend.

The company must pay this dividend from its profits before ordinary shareholders can receive dividends.

The only costs related to raising money on the capital markets by way of a share listing are the administrative cost of setting up the initial issue. And then paying the costs of maintaining the listing.

So there you have it, why companies sell shares.

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