Author: Maks Artemov
When you invest long-term and medium-term, you can face such a stock market phenomenon as additional issue of shares. Not all investors understand how it influences the capitalization of companies or their share prices, so feel vulnerable in such situations. Today’s article is devoted to the details of additional issue of shares.
What is additional issue of shares?
Under additional issue we understand issuing and selling new shares of a company in order to attract new capital. This measure is meant to neutralize negative factors that influence the economic situation of the company, to help expand the business, or to launch new projects that require investments.
How can a company attract money?
A profitable company can allocate a part of the profit to reaching new goals. However, if the size of the profit is not enough or the new project requires a colossal influx of money, the company decides on an additional issue.
Another option is using loans and credits. These require extra expenses on serving them and paying off interests. This is not always profitable and increases the financial load on the company.
The influence of the additional issue on the share price is quite ambivalent. The share price may drop significantly and recovery will take quite long. However, the inflow of finance in the company generated at smaller expense will have a good influence on the company in the future.
What is additional issue of shares meant for?
- Attracting extra money to support or develop the business
- Increasing authorized capital
- Expanding the share of large investors for making them more influential in the company
- Avoiding extra expenses on paying off loans
- The board of directors and major investors decide to issue additional shares. They agree on the size of the issue and the initial share price.
- The decision is ratified based on the company charter.
- The authorities register the additional issue by all legal procedures.
- The issued shares are sold among the existing investors of the company. The remaining shares are placed in the stock market where they become available to anyone who wants them.
- The company charter gets amended, namely — the charter capital and the number of the shares in turnover.
How does the additional issue influence the share price?
In most cases, additional issue drives the share price down. In the future, the quotations can recover and even grow, but normally it takes quite long, several years sometimes.
Example of additional issue
The N production company had 1 million of shares in turnover that cost $1 each. Hence, the capitalization of the company reached $1 million. The board of directors and the stock meeting decided to attract additional investments sized $500 thousand. The money was necessary for building a new plant and expanding production to enter new markets.
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Sincerely,
RoboForex team
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