A company can sell its shares to raise funds by different methods as follows:
1. Public Offering
A large-scale company generally raises funds through public offering.Under public offering, common stocks are sold to large numbers of investors. Normally, when a company wishes to issue new securities and sell them to the public, it makes an arrangement with an investment banker. The investment banker acts as a middleman who brings together suppliers and users of the long-term funds in capital market. Its major function is to buy the securities from the company and then resell them to investors at a higher price. This difference in the purchasing price and selling price also called 'spread' is commission to the investment banker. The purpose of going public is to increase the ownership base. A firm generally goes public when growth opportunities no longer can be financed solely by debt and a existing stockholders base.
2. Private Placement
A company can sell its shares directly or privately to a few/ a group of individual investor or institutional investors instead of having them underwritten and sold to the public. This type of sale is called private or direct placement. In private placement, the company negotiates directly with the investors over the terms of offering. Private placement has a number of advantages as follows:
- Flotation costs can be reduced by eliminating underwriting costs.
- It takes less time to raise funds through private placement.
- It is suitable for small scale company to raise funds.
3. Right Offering
Instead of selling common stocks to new investors, company can offer the new common stocks to the existing shareholders at a subscribed price on pro-rate basis. This method of issuance is called right offering. Right offering is also called privileged subscription. This right offering helps to reduce flotation costs. It also protects existing shareholders from dilution in wealth and control power.