Finance

What Is A Share Issue & Why Might A Business Do It?

Allison S Robinson | 25 August 2022 | 2 years ago

what is a share issue

A share issue refers to the process of a company releasing shares to sell either to existing shareholders or the public. Both individuals and corporate bodies may buy the issued shares, and this means the company is able to raise money from these investors.

In this article, we will go into detail on what a share issue is and why companies might choose to execute one. We will also look at the types of share issues available and the benefits and disadvantages of each. Finally, we will explore how companies go about issuing shares and some of the alternatives to a traditional share issue.

What is a Share?

A share is a unit of ownership in a company – when you buy shares in a company, you are buying a small piece of that business. As a shareholder, you are entitled to certain rights and privileges. These may include the right to vote on company matters, the right to receive dividends (if the company makes profits), and the right to attend shareholder meetings.

All companies have a limited number of shares that they can issue. This is known as the share capital of the company and it is set out in the company’s articles of association. Once all the shares in a company have been issued, no more can be issued without first changing the articles of association.

What is a Share Issue?

When a company wants to raise money, it can do so by issuing new shares – this is known as a share issue. The company will sell the new shares to investors in order to acquire capital and the investors will then become shareholders in the company.

There are different types of share issues that companies can carry out, each with its own benefits and disadvantages. We will explore these in more detail below.

What Are The Different Types of Share Issues?

There are two main types of share issues: a rights issue and a public offer.

A rights issue is when a company offers its existing shareholders the opportunity to buy new shares first. The shareholders will be given the “right” to buy the new shares before they are offered to the public. This type of share issue is often used by companies that are struggling financially as it is a quick and easy way to raise money, however, it can be dilutive to existing shareholders and is restricted to a smaller number of investors.

A public offer is when a company offers its shares to the public. This type of share issue is often used by companies that are looking to expand their business. It can be a more difficult and time-consuming process than a rights issue but it can also be more lucrative for the company because it can reach a wider pool of potential investors.

shareholders

Why Do Companies Carry Out Share Issues?

Companies will often carry out share issues in order to raise money for the business. This money can be used to finance expansion plans, pay off debts, or invest in new products or services. Companies can also use share issues to reduce their dependence on bank loans and decrease debt.

Share issues can be used to dilute the ownership of existing shareholders as well. For example, if a company is looking to sell shares to the public for the first time, the existing shareholders will see their ownership stake in the company reduced. Although this dilution is not always seen as positive by the shareholders themselves, it can be advantageous if it results in company growth and more stability with a broad range of shareholders.

Lastly, share issues can also be used to increase the liquidity of a company’s shares – the company may sell new shares to the public in order to create a market for its existing shares. This can be beneficial for shareholders who are looking to sell their own shares, as it makes it easier for them to find buyers.

How Do Share Issues Work?

The process of carrying out a share issue will vary depending on the type of share issue and the company’s articles of association.

For a rights issue, the company will first need to pass a resolution at a shareholders’ meeting. This resolution will give the board of directors the authority to issue new shares. The board will then set the price of the new shares and send out a circular to all shareholders detailing the offer.

If you are an existing shareholder, you will be given the “right” to buy the new shares before they are offered to the public. This means that you could be able to buy the shares at a discounted price and you will also have the option to sell your rights to another investor if you do not want to buy the shares yourself.

For a public offer, the company will need to prepare a prospectus and submit it to the Securities and Exchange Commission (SEC). The SEC will review the prospectus to make sure that it is accurate and complete, and once they have approved the prospectus, the company can begin selling its shares to the public. The shares will be sold through an investment bank or a broker-dealer.

What Are The Benefits of Share Issues?

There are several benefits that companies can enjoy from carrying out share issues, with the main benefit being that it can be a quick and easy way to raise funding for the business. Share issues can also be used to dilute the ownership of existing shareholders, and can make the business appear more attractive to potential investors. Additionally, share issues can increase the liquidity of a company’s shares, which can be beneficial for existing shareholders.

Another advantage of share issues is that they can give companies a way to finance their expansion plans without having to take out loans from banks. This can be helpful for companies that are struggling financially as it can help them avoid taking on more debt.

What Are The Disadvantages of Share Issues?

There are also some disadvantages that companies need to be aware of before carrying out share issues. One downside is that share issues can dilute the ownership of existing shareholders which can lead to these shareholders losing voting rights and control over the company. Additionally, if a company is looking to sell shares to the public for the first time, the existing shareholders will see their ownership stake in the company reduced.

Another disadvantage of share issues is that they can be dilutive to earnings per share (EPS). This means that the company’s earnings will be divided among a larger number of shares, which can reduce EPS.

Lastly, share issues can also be used to increase the liquidity of a company’s shares. While this can be beneficial for shareholders as it makes it easier for them to sell their shares if they need to, it can also make the company’s shares more volatile.

Issued Shares vs Outstanding Shares

It is important to note that there is a difference between issued shares and outstanding shares. Issued shares are the total number of shares that a company has sold, while outstanding shares are the number of shares that are currently owned by shareholders.

For example, let’s say that a company has 100 million issued shares and 90 million outstanding shares. This means that the company has sold 100 million shares, but that 10 million of these shares have since been bought back or returned to the company.

The number of outstanding shares can change over time as a result of share repurchases, share dilutions, and other events.

Why do Investors Buy Shares?

There are several reasons why investors might buy shares in a company. The first reason is that they believe the company will be successful and that the share price will increase. This is known as speculative investing and is often associated with higher risk.

The second reason is that investors want to receive dividends. Dividends are payments that companies make to shareholders out of their profits. They can provide a steady income stream, even if the share price does not increase.

The third reason is that investors want to have a say in how the company is run. This is known as active investing and is often associated with lower risk.

Finally, some investors buy shares for reasons that have nothing to do with the company itself. For example, they might buy shares because they think the stock market will go up.

If you are considering becoming a shareholder, it is important to understand what your goals are before purchasing any shares.

dividends

How to Issue Shares in a Private Company

If you are a shareholder in a private company, you will need to follow the company’s procedures for issuing new shares and this will be outlined in the company’s articles of association.

The first step is to contact the company’s board of directors and request permission to issue new shares. The board will then set the price of the new shares and send out a circular to all shareholders detailing the offer.

If you are interested in purchasing new shares, you will need to submit an application form to the company. Once your application has been approved, you will be issued the new shares and will become a shareholder in the company.

How to Issue Shares in a New Company

If you are setting up a new company, you will need to follow the procedures for issuing shares set out in the Companies Act.

The first step is to register the company with Companies House. Once the company has been registered, you will need to prepare a memorandum and articles of association. These documents will need to be signed by all shareholders and filed with Companies House.

Once the company has been incorporated, you will need to issue share certificates to all shareholders. These certificates will need to be signed by at least two directors and must specify the number of shares that have been issued. The company will also need to keep a register of shareholders, which must be available for inspection by any shareholder upon request.

Can Companies Issue Shares to the Public?

Companies can issue shares to the public and this is known as a public offering or an initial public offering (IPO).

When a company goes public, it will need to prepare a prospectus. This document will contain information about the company, its business model, and its financial condition.

The company will also need to appoint an investment bank to act as its underwriter. The underwriter will help the company to determine the price of its shares and will buy any unsold shares.

The company will then need to list its shares on a stock exchange, such as the London Stock Exchange or the New York Stock Exchange.

public offering

Are There Any Alternatives to Share Issues?

There are some alternatives to share issues. One alternative is to issue bonds – bonds are a type of debt instrument that allows companies to borrow money from investors. Unlike shares, bonds do not give investors an ownership stake in the company but do offer a fixed rate of interest.

Another alternative is to take out a bank loan. This is a good option for companies that need to raise a large amount of money and can offer collateral to the bank.

Finally, companies can also raise money by selling assets. This is often done by family-owned businesses that do not want to give up control of the company and do not want to take on debt.

Share issues are just one way for companies to raise money. There are a number of alternatives that your company can consider, depending on your needs and preferences.

Final Thoughts

If you have been wondering what a share issue is, we hope this article has helped. Share issues can be a great way for companies to raise money, but they are not the only option. Companies can also consider alternatives such as bonds, bank loans, or asset sales. Each option has its own advantages and disadvantages, so it is important to do your research and choose the right one for your company.

If you are considering issuing shares, make sure to consult with a financial advisor to ensure that it is the best option for your business. With the right planning and advice, share issues can be a great way to raise money for your company.

 

Topic

Finance

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