Why do companies sell their shares through an IPO?

 

Reasons why Companies issues IPO

A share represents ownership in a company, and every type of business will have shares, whether private, public, or partnership. When you buy shares, you essentially become an owner of a portion of that company. In the stock market, a share represents ownership in a specific company, typically entitling the holder to voting rights and a portion of the company's profits.

There are various types of shares, but two primary categories are Equity Shares and Debt Shares. Both of them are traded in the market.

Equity Shares

  • Common Shares: These represent ownership in a company and come with voting rights at shareholder meetings. Common shareholders participate in the company's profits through capital gains and dividends. This is the type of share you generally purchase in the form of an IPO.

  • Preferred Shares: Preference shareholders are considered partial owners of the company, but they typically have limited voting rights compared to common shareholders. Their ownership entitles them to certain preferences, such as priority in receiving dividends or assets in the event of liquidation, but they may not have the same level of control or influence over company decisions as common shareholders.

Debt Shares

  • Debentures: While not exactly shares, debentures are debt instruments issued by companies. Investors who buy debentures lend money to the company and, in return, receive periodic interest payments along with the principal amount at maturity.

Why companies issues share in the form of IPO ?


Companies issue shares to raise capital for various needs, like expanding their business or funding new projects. They may issue a debt share or equity share. Issuing equity shares means selling ownership of the company, while issuing debentures means taking a loan from the market. Companies decide whether to issue equity shares or debentures based on several factors, including their financial needs, capital structure, risk tolerance, and market conditions.

In simple terms, companies typically prefer to issue equity when they are in their growth stages, experiencing rapid expansion, or have a high-risk appetite. Equity issuance allows them to raise funds without increasing debt obligations and is often chosen by companies with positive future outlooks. 

On the other hand, companies with stable cash flows, lower risk tolerance, or already high levels of debt may opt for debenture issuance, which offers fixed-cost financing without diluting ownership.