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Why Do Companies Issue Shares?
Posted by: | CommentsCompanies have to raise money to support the ongoing growth of the company – to do this they need to either borrow cash, or sell part of the company. As each share is a small part of the company, the latter option is issuing shares.
Debt financing is the first option – borrowing cash to expand. Companies either take out a loan from a bank, or borrow money from bond holders for a fixed period (i.e.: issuing bonds). Those who buy a debt investment in a company, in this case the banks for the bond holders, they are promised the return of their investments, known as the principal, as well as interest payments stated at the outset of the investment. This is similar to taking out a mortgage – if a new homeowner takes out a mortgage, the bank makes a debt investment in the homeowner. If the mortgage is for cost $300,000, the bank is guaranteed the return of that $300,000, along with monthly interest charges.
Equity financing is the second option – issuing shares. The advantage of issuing shares over debt financing is that the company isn’t required to pay back the money or make interest payments. In return for investing in the shares, shareholders hope that the value of the company will rise and they’ll be able to sell the shares for a higher price than what they paid for them. This means that shareholders take on the risk that the company’s value might not go up, and the value of the shares will be less than what was paid for them.
If a company goes into liquidation, the debt financers will have a higher claim to the company’s assets than equity financers, meaning that banks and bond holders have a larger claim to the assets than shareholders. This could result in shareholders losing their entire investment. When a company first issues shares, this is known as the Initial Public Offering. A company might also issue new shares throughout its existence, perhaps because additional equity is required, either for further expansion or to distribute among current investors so they may benefit in the company’s future success; or it might issue shares as part of an employee bonus scheme.
Investing in shares does not guarantee a profit – many companies pay dividends to shareholders, and some do not. Many companies will increase in value, and some may not. However, the positive side of taking on risk is that risk offers greater return on your investments – traditionally, shares have had an average long-term return of about 10-12% of the initial investment, which is much higher than bonds or savings accounts.
To take on a higher level of risk, and a higher level of potential returns, traders might consider trading Share CFDs. Share CFDs are contracts that capture every aspect of share trading, but the trader only needs to outlay 5% of the value of the position – this means that traders can gain greater exposure with lower capital requirements than in traditional share trading.
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Mid Cap Stocks
Posted by: | CommentsThe definition of a mid cap varies greatly depending upon who you ask. People may define mid-caps as being companies with a market capitalization between $1.5 billion and $5 billion. Others bump that number up a bit and define them being between $2 billion and $10 billion. In the end, it depends on exactly who you ask. Market capitalization, simply put, is the company’s stock price, multiplied by the number of shares outstanding. It is basically the value the market places on a company.
Large caps are typically more alluring to some experts because they are perceived to be the safest and most reliable. The general assumption is blue chip stocks are strong and steady. But as Enron and others have proved, that isn’t always the circumstance. Risk exists throughout the market, and in some cases, with lowered risk, comes reduced growth.
Meanwhile, many small caps might be a bit too bumpy of a ride for some investors. Smaller, less-established companies mean there might be a bigger chance for growth but also more volatility. Many investors cannot handle the ups and downs that small caps offer. Small caps are often ignored by many analysts and thus, do not receive as much attention. Meanwhile, many large cap stocks are frequently highlighted. Mid caps, once again, fall into the middle child category.
Mid cap stocks have become a popular investment of late because of the attractive qualities that many investors see in them. Frequently the companies are primed for potential growth, at the same time they’ve already gone through some of the growing pains which small-cap stocks haven’t experienced.
Experts say that by the time a company has ventured through life as a small cap, they are often better prepared to take care of the market’s sufferings. They’ve also typically had a chance to put quality management in place, and better refine their product and their message.
The size of the market capitalization you choose to invest in, has a great deal to do with your current financial situation and the amount of risk you are prepared to accept. Meeting with a financial expert to assess your needs and goals, is one of the first steps towards setting a plan for the future. While no one investment is perfect for everyone, certain investments do fit well for people in particular situations.
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