Why Do Companies Sell Stocks?

Initial Public Offering

To become listed on the stock market, a company first has to issue an IPO, or initial public offering, with the help of a brokerage firm. After this IPO has been issued, company stock is traded on stock exchanges, such as the NYSE and Nasdaq.

Misconceptions

Firms that list themselves on stock exchanges do so to raise capital; however, it is important to note that once they are listed on a stock exchange, the company in question gets no more revenue streams unless it issues more stock. Stock exchange transactions are private, between the buyer and seller of the stock, and the firm in question receives nothing.

Effects

By listing themselves as a publicly traded company, the owners of the company can sell their shares to the world at any time. Corporate takeovers occur when one entity (person, investment group, firm, etc.) buys up the majority shareholdings of a company.

Considerations

Companies usually only list themselves on the stock market when they are established and large, because, typically speaking, the stock market is an expensive source of capital for the firm. Bank loan rates typically are lower than the rates of the stock market, so most firms try to exhaust or at least utilize banking options before turning to the stock market.

Warning

When a company sells shares of itself, it is actually selling units of partial ownership. By selling too many shares, it is possible for the original founders of the company to lose their position as the company's leaders. Further, by selling partial ownership, firms agree to take on certain roles and responsibilities, for example, responsibilities to corporate governance by board of directors and oversight by the Securities and Exchange Commission. These add to the costs businesses face associated with raising capital via the stock market.