When a company lists its shares on a stock exchange investors can buy a share(s) (means a part of the company) also called equity (equal ownership). By acquiring shares in a public company you own part of the company in the same way as you would in a private company.
Benefits of listing on a stock exchange
- Raise cheap capital
Public financing allows management to raise larger sums of money from a large pool of investors at a cheaper rate as compared to borrowing the money from a bank. The cost of raising the money does not equal the interest charges that a company pays on borrowed money. Money raised from the public through a public listing is not repayable to the investors that is why investing in the stock market is considered a high risk. The company’s fortunes may turn out to be negative and fail to grow or achieve its anticipated growth that may cause the share price to appreciate or generate good profits from where it will pay dividends to its shareholders.
- Attract and retain employees
When a company decides to go public one of the things they do is to set aside a certain percentage of the shares which are meant for employees – employee share ownership scheme. In order to retain or attract top talent employees are offered shares options which they can exercise after a number of years. When the employee buys the shares he or she becomes one of the owners of the company so no owner works against the interest of their organization. When the company performs well assuming all other factors that contribute to good results are also positive the share price appreciates meaning every shareholder benefits from this appreciation. So employees who own shares in the company usually become loyal to the company and work harder.
- Build a public image
When a company lists on a stock exchange it attracts institutional investors (insurance companies, pension funds, unit trusts, asset management companies, other listed companies, private companies and individuals). The interest it gathers helps to build its credibility in the market because it would have passed listing and regulatory requirements. The performance of the shares on the stock market speaks of how well the company is perceived in the market both its products and management.
- Higher profile
Companies listed on stock exchange are highly noticeable and identifiable than the privately held companies. Listed companies are able to entice new customers and clients and attract more media attention (because every activity they make has a bearing on their image so the media always want to be there when it happens). In a way they get free media coverage which helps build their brand visibility. Non listed companies rarely get this opportunity to attract media attention mostly they pay to be advertised.
The fund raising process may happen a number of times in the life of the organization through rights issue. A rights issue happens when a company needs to raise some money again but this time it first gives the right to acquire additional shares in the company to existing shareholders. If all the existing shareholders follow their rights the shareholding structure remains the same as before the rights issue. When other shareholders fail to follow their rights the additional shares issued are taken by an underwriter who becomes a new shareholder and this changes the shareholding structure meaning those shareholders who failed to follow their rights will have their shareholding reduced. To the company again it would have raised additional capital cheaper than borrowing from the banks.