Why do companies issue common shares?

Companies issue common shares to those investors interested in acquiring an ownership interest in the business.

The company uses the investors’ funds to start and/or build their business. The funds could be used to start the business, expand the business, and to purchase other companies or businesses.

When a company issues shares to the investing public for the first time, this is called an Initial Public Offering (IPO). If the company is issuing additional shares to investors then they are said to be making a Secondary Offering or selling a New Issue of shares.

While a company may issue shares in the beginning to raise the capital, the company may also issue shares for a number of additional reasons as listed below:

  • A company may issue shares as payment for a recent acquisition instead of paying with company cash resources or borrowing.
  • The Board of Directors may declare a dividend to be paid by issuing additional whole fractional shares to existing shareholders. This is often referred to as a “Share-Split.”  In this case the company may declare and shareholders may approve a dividend equal to three new shares for each two old shares held by investors. The result is that existing shareholders will receive one half of a share for every share they own. Thus, if the investor owns 200 shares, the company will issue them an additional 100 shares, as their declared dividend.
  • The company may decide to issue new shares to its employees as a portion of the employees’ compensation package.
  • To support a dividend reinvestment program for existing shareholders.
  • To pay a dividend in shares instead of using company cash resources.
  • To complete a conversion privilege for an existing investor, i.e. convertible bonds, convertible preferred shares.
  • To convert a credit investor into an equity investor, i.e. bankruptcy

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