Equity securities are shares of stock that companies issue to raise capital for events such as expansion or product development. The first issuance is called an IPO, and subsequent offerings are called secondary or continuation offerings. Issuing more shares dilutes existing shareholders’ ownership. Debt securities, such as bonds, are an alternative to equity.
Equity securities are shares of stock held by investors, as reported on a company’s balance sheet. A company issues equity securities as a means of raising capital in the financial markets for a major event, such as an expansion or merger, or for product development. By buying stock, shareholders get a partial ownership interest in that company. The issuance of shares is an alternative to the issuance of bonds, which are a form of debt, in the public markets.
The first time a company issues equity securities in the financial markets is known as its initial public offering (IPO). A company will typically raise large sums of money in this transaction, because investors often flock to new issues for a promising opportunity. The number of equity securities issued in an IPO depends on the financial documents filed by the company with a region’s regulatory body. A company is allowed to sell a certain number of shares within a particular price range on the day it goes public. Once the shares are issued on the public markets, the share price will rise and fall based on investor demand.
Typically, a company will not issue all of its available shares in a single offering. Instead, a series of shares are typically reserved for a later offering at a future date, known as a secondary or continuation offering. A company’s management team does this because they anticipate the need to raise capital again to finance future growth plans.
One disadvantage of issuing equities in the financial markets is that the more shares are available for investors to purchase, the more existing shareholders will find their percentage ownership of equity diluted. For example, a large holder of equities might own several shares that represent 10 percent of a company’s total shares available for trading. If the company decides to increase the total number of shares available for trading, that shareholder’s equity ownership instantly decreases as a percentage of the total shares outstanding.
If a company decides not to issue equity, debt securities are the other main option. Debt securities are bonds issued in the public market by a corporation or a government. By purchasing a debt instrument, investors become instant creditors of an issuer. The main drawback of issuing debt is that although the sale of bonds does not give shareholders partial ownership of the entity, the issuer must make ongoing interest payments to those shareholders over the life of a contract.
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