New Issue
Companies can also raise capital by selling stocks in the primary and secondary markets. Investors who buy the stocks of the company get to own a piece of the company depending on the number of shares they own. A new issue refers to a stock or bond offering that is made for the first time. Most new issues come from privately held companies that become public, presenting investors with new opportunities.
Understanding a New Issue
A new issue is conducted as a means of raising capital for a company. Firms have two main choices issuing debt or issuing equity in the form of stock (i.e., selling a portion). Regardless of which route they take, they will be making a new issue when those securities are offered for sale. Governments will also create new issues of sovereign debt in the form of Treasury securities in order to raise funds for government operations.
Example of a New Issue
Say a new IT company has developed a program to make cash exchanges easily available worldwide. It has been successful in both generating revenues and garnering interest from the venture capital community. To grow, however, it believes it needs more capital, approximately Rs.30 million, which it doesn’t have on hand. As such, it needs to raise this capital through external sources. That’s when they decide to go a merchant banker and start the process of new issuance- which is called as an IPO (Initial Public Offer)
Advantages
Less expensive: Selling stocks to the public does not add more debt to the company. Instead, it allows investors to become owners of the company and get a share of the annual profits. The investors also participate in the decision-making process of the company.
No stellar credit rating: Start-ups and other companies without a known track record may be unable to access credit facilities that are available to successful companies. This is because lenders may view them as too risky and deny them the needed capital. However, with equity, these companies can attract investors who are willing to wait and grow their investments in the company. The investors become real owners of the business and get to participate in dividend and profit sharing.
Disadvantages
Dilute ownership: Every time a company makes a new issue of stock, it dilutes the ownership of the existing shareholders. The current shareholders’ ownership stakes and voting powers decrease as new members join as shareholders and acquire ownership interests in the company.
