Different companies that represent various industries issue stock while going public. It is difficult to decide on changing a private company into a public one. Even though it is not easy to achieve this situation, the business can receive many advantages thanks to switching from private into a public one. When becoming public, a company has got an initial public offering, so other people are allowed to buy shares of the company in the form of stocks. After some time, a company can decide on issuing more stock shares.
Why do companies decide to issue stock?
The most important reason for issuing stock by a company is getting additional money that can be important for the further development of a firm. It means that money earned with the use of IPO (initial public offering) can be used to build factories or buy additional equipment, so the company will generate more and more profit. There are also many other reasons for issuing stock like getting money for new product development, decreasing debt, etc.
The initial public offering can provide a very large amount of money to a company, but still, many firms do not decide to go public and issue stock. They are worried about some disadvantages of this situation. Having a public company is associated with a responsibility for observing all federal and state regulations for publicly traded companies. It is also required to make information about earnings available to anyone interested in it. This is very difficult for companies that want to keep their financial information away from other people. Owners of public companies also report to their investors.
How can investors receive returns with profit?
Everyone who decided to buy stock in a company is interested in getting profits and returns. Most investors are looking for compounding returns (the rate of returns associated with accumulation of gains and losses in a specific period). In other words, companies with stock that produced a large return, are the most attractive ones for investors. For example, a company with a stock that produces a 10% annual compound return in five years, at the end of the fifth year the capital of stock will be the equivalent of getting 10% each year.
Stocks and bonds – is there any difference between them?
In the case of buying stock or share, the price of the stock or share increases when the business does well and it decreases when the business does poorly. Bonds are much different because in this case, investors loan money to a company or entity (government or corporation). In the case of bonds, the entity borrows money for a specific time at a fixed or variable rate of interest. In other words, investors who own bonds are creditors of a company or entity. The bonds are much secure than stocks, but their rate is much smaller. Stocks are associated with some risk, but they can give much bigger profit to their investors.
As you see, issuing stock is important for companies that are interested in getting additional money for further development and improvements. It has got some advantages and disadvantages, so it is good to get some information about them.