Why Companies Issue Stock
Why companies sell ownership instead of borrowing, how an IPO works, and what happens when a public company sells more shares later.
The short version
Companies raise money from outside investors in two main ways: borrowing, which must be repaid with interest, and selling ownership, which doesn't have to be repaid but gives away a share of the business. An IPO is a company's first public sale of shares, usually with the help of investment banks called underwriters. After going public, companies can sell more shares, which reduces existing owners' percentage stakes.
By the end of this lesson, you'll be able to
- Compare raising money by borrowing with raising money by selling shares
- Describe the main steps and players in an IPO
- Explain what a follow-on offering does to existing shareholders
Why this matters
Every share you can buy exists because a company decided, at some point, to sell part of itself. Understanding why and how companies do that explains a lot: why some companies avoid issuing shares, why new share sales can move prices, and why IPOs attract so much attention and so much risk.
Two ways to raise money
A company that needs money to grow, beyond what it earns, usually has two main options with outside investors:
| Borrowing (debt) | Selling shares (equity) | |
|---|---|---|
| Must be repaid? | Yes, on a schedule | No |
| Ongoing cost | Interest, whether business is good or bad | None required, but new owners share future profits |
| Control | Lenders don't own the company | New shareholders own part of it and usually vote |
| If things go badly | Missed payments can push the company toward bankruptcy | Shareholders absorb the losses |
STU Corp, a fictional company with 10 million shares, all held by its founders, wants $50 million to build a new factory.
| Option A: borrow | Option B: sell shares | |
|---|---|---|
| How | A loan at a hypothetical 7% a year | 2.5 million new shares at $20 |
| Yearly cost | $3.5 million in interest | No required payment |
| Must repay $50 million? | Yes | No |
| Founders' ownership after | 100% | 80% (10 of 12.5 million shares) |
Neither is free. Borrowing keeps ownership but adds fixed payments that must be made in bad years too. Selling shares avoids repayment but gives up a fifth of the company, including a fifth of every future dollar of profit.
The rest of this lesson is for members
Still to come in this lesson: Going public: the IPO, Why go public?, After the IPO: selling more shares, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Dilution and Stock SplitsPart 2: What You Can Own
- Capital StructureCorporate Finance (depth track)
- Debt, Covenants, and Credit RatingsCorporate Finance (depth track)
Notes and sources
- U.S. Securities and Exchange Commission. Investor Bulletin: Investing in an IPO. Checked 2026-09-26.
- Investor.gov, U.S. Securities and Exchange Commission. Updated Investor Bulletin: Investing in an IPO. Checked 2026-09-27.
- Investor.gov, U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements. Checked 2026-09-27.