Companies need money to grow, and there are several ways they can raise capital by issuing securities (ownership units). Here’s a breakdown of the most common methods:
Going Public for the First Time (IPO):
- An unlisted company offers its shares to the public for the first time.
- This allows the company to raise a significant amount of money and gain wider recognition.
- There are two options:
- Fresh Issue: The company creates new shares to sell.
- Offer for Sale: Existing shareholders sell some of their shares to the public.
- After an IPO, the company’s shares are typically listed on a stock exchange for trading.
Raising More Capital After Going Public (FPO):
- A company that is already listed on a stock exchange can issue more shares to the public.
- Similar to an IPO, there are two options:
- Fresh Issue: The company creates new shares to sell.
- Offer for Sale: Existing shareholders sell some of their shares to the public.
Rights Issue: Giving Existing Shareholders the First Dibs
- A company offers new shares to its existing shareholders at a discounted price.
- Shareholders are given “rights” to purchase these new shares in proportion to their existing holdings.
- This allows the company to raise capital without significantly diluting the ownership stake of current shareholders.
Preferential Issue: A Faster Route for Selected Investors
- A company issues new shares or convertible securities (securities that can be converted into stocks) to a select group of investors.
- This is a faster way to raise capital compared to a public offering.
- The company must comply with regulations regarding pricing, disclosures, and who can be offered these preferential shares.
By understanding these different methods, you can gain better insight into how companies finance their growth and how these events might impact existing shareholders and the overall stock market.