When any company needs fund, it raises it through the issuance of shares, debentures, by public placement, bonds etc.
Share :- When any company issue its share first time in the market for the public ,it is said to be Initial Public Offering(IPO).First time companies issue its share through the primary market and after that these share are traded in the secondary markets. To trade its share in any of the stock exchange, company must have to register it to these exchanges. Second time, when companies issue fresh share to raise fund, it is said to be the follow- on Public offering (FPO).
Another method to raise fund through share is private placement in which companies directly deal with the institutional investors, It is a cost effective method to raise fund.
Issue of Bond and Debenture: – Companies also issue Bonds and Debenture to finance its needs. Bond and debenture holders are treated as the Creditors and Companies must have to pay their fixed interest even when the company is in loss.
As an idle debt equity ratio is said to be 2:1 and if the ratio of debt is greater then this then, it is said to be dangerous for the company & its shareholders.
Risk and Return Relationship for the Investors
Companies hire underwriters and these underwriters take the remaining shares in case of under subscription.
Good companies get a very good response from the market during its public offering and its share also goes for oversubscription. Companies with good business get better response in secondary market also because of the confidence of public and stakeholders.