Stock Market

To grow their operations, expand into new markets, or develop new products, companies often need additional capital. One of the primary ways they raise this capital is by issuing shares. Depending on their financial goals and legal structure, companies have multiple methods available to issue these shares. Each method has its own rules, process, and audience.

This article explains the six main methods through which companies can issue shares, written in simple and clear language.

1. Public Issue (IPO and FPO)

A public issue is the most common and widely recognized method of issuing shares. In this method, the company offers its shares to the general public through a stock exchange.

When a company offers its shares to the public for the first time, it is known as an Initial Public Offering or IPO.

If the company is already listed and decides to issue more shares to raise additional capital, it is called a Follow-on Public Offer or FPO.

Companies choose this route when they want to raise a large amount of capital and get listed on the stock exchange. Public issues are strictly regulated by government bodies like SEBI in India or the SEC in the United States to ensure transparency and investor protection.

2. Private Placement

Private placement is a method where a company issues its shares to a selected group of investors rather than to the general public. These investors may include banks, mutual funds, venture capital firms, or high-net-worth individuals. This method is faster and involves less regulatory compliance than a public issue, making it an attractive option for companies that need quick funding.

In India, the number of investors in a private placement is legally restricted to not more than 200 in a financial year. Companies usually choose this method when they want to raise funds efficiently without the delays and costs associated with public offerings.

For example, MSEI is planning to raise ₹1,000 crore by issuing 500 crore shares through private placement.

3. Rights Issue

In a rights issue, the company offers new shares to its existing shareholders in proportion to the number of shares they already own. This means that if a shareholder owns 100 shares, and the company announces a 1:5 rights issue, they have the right to buy 20 additional shares.

The shares are usually offered at a discounted price to encourage existing shareholders to invest more in the company. This method allows companies to raise additional funds while ensuring that control and ownership remain with the current investors. It is a fair and transparent method to raise capital without diluting existing ownership too much. Many companies prefer this method during expansion or restructuring phases.

4. Bonus Issue

A bonus issue is a method where the company issues additional shares to existing shareholders without charging them anything. These shares are given free of cost and are usually issued from the company’s accumulated reserves or retained earnings. The bonus shares are distributed in a specific ratio, such as one bonus share for every two shares held.

Although no fresh capital is raised through a bonus issue, it serves as a way to reward existing shareholders and increase the total number of shares in the market. This can also improve the stock’s liquidity, making it more attractive to small investors.

For instance, if a company announces a 2:1 bonus issue, shareholders will receive one extra share for every two shares they already hold.

5. ESOP and Sweat Equity

Companies often offer shares to employees and key personnel through methods like the Employee Stock Option Plan (ESOP) or sweat equity. In an ESOP, employees are given the option to purchase shares of the company at a fixed price after a certain period. This serves as a long-term incentive and helps retain talented employees.

Sweat equity refers to shares issued to employees or directors in return for their contribution in the form of skills, expertise, or intellectual property rather than cash. These methods not only build employee loyalty but also align their interests with the company’s long-term growth.

Many startups use ESOPs to attract and motivate top talent when they are unable to offer high salaries.

6. Preferential Allotment

Preferential allotment is a method in which shares are issued to a specific group of individuals or institutions at a pre-agreed price. Unlike private placement, which is limited in number, preferential allotment is often used for strategic purposes such as mergers, acquisitions, or raising capital from known investors.

This method requires approval from shareholders through a special resolution and follows regulatory procedures to ensure transparency. Companies prefer preferential allotment when they want to bring in strategic partners or promoters without going through the lengthy process of a public issue.

For instance, a company might issue shares to a private equity firm as part of a strategic alliance

This article is for informational purposes only and should not be considered financial advice. Investing in stocks, cryptocurrencies, or other assets involves risks, including the potential loss of principal. Always conduct your own research or consult a qualified financial advisor before making investment decisions. The author and publisher are not responsible for any financial losses incurred from actions based on this article. While efforts have been made to ensure accuracy, economic data and market conditions can change rapidly. The author and publisher do not guarantee the completeness or accuracy of the information and are not liable for any errors or omissions. Always verify data with primary sources before making decisions.

Inflation is something we hear about almost every day in the news. To measure this inflation, economists use an important tool called the CPI.

If you are new to finance or trading, CPI is one of the first concepts you should understand.

What is the meaning of Inflation?

When the cost of basic goods that we buy every day- like food, clothes, and other essentials-rises over time, this situation is called inflation.

Inflation causes reduction in the purchasing power of money. When prices go up, the value of money decreases. This means that you can buy less with the same amount of money.

For example, if inflation is high, something that used to cost $100 might now cost $110.

This reduction in the purchasing power of money is what we call inflation.

• Inflation is measured using the CPI.

What is CPI?

The full form of CPI is Consumer Price Index. It measures how much the prices of goods and services that households usually buy have changed over time.

The CPI is like a basket that contains a variety of basic goods and services that a typical household needs, such as food, clothing, and healthcare. By tracking the price changes of these items over time, we can calculate the inflation rate.

Why is CPI Important?

CPI is not just a number. It tells us how the cost of living is changing. Here are some reasons why CPI is important:

• For Households: It shows how much more expensive daily life is becoming.
• For Businesses: Rising CPI means higher costs for raw materials and services.
• For Governments: Policymakers, especially the central bank (like the Federal Reserve in the US), use CPI to make decisions about interest rates.
• For Investors and Traders: CPI can move markets. A higher-than-expected CPI can push stock markets down and strengthen the US dollar, while a lower CPI can have the opposite effect.

How is CPI Calculated?

The calculation may sound complex, but the idea is simple.

1. A fixed basket of goods and services is chosen.
2. Prices of these items are collected every month.
3. The average change in these prices is calculated.

If the CPI goes up, it means inflation is rising. If it goes down, it means inflation is easing.

Imagine last year you spent $1,000 on rent, groceries, gas, and clothes combined. This year, buying the same things costs you $1,050. That extra $50 means prices rose by 5%. CPI is the tool that captures this increase in prices and reports it as the inflation rate.

Types of CPI

There are two main types of CPI:

1. Headline CPI: This includes everything in the basket – food, fuel, rent, healthcare, and more. But food and fuel prices can jump up and down quickly, which sometimes makes headline CPI volatile.
2. Core CPI: This excludes food and fuel prices because they change too often. Economists use core CPI to get a clearer picture of long-term inflation trends.

What is Inflation Rate?

It is the percentage change in the price level of goods and services over a period of time. It’s like a report card that tells us how much prices have gone up or down. For example, if the CPI was 100 last year and it is 105 this year, the inflation rate would be 5%.

How Inflation Rate Affects Stock Market?

Inflation can have a significant impact on the stock market.

When inflation is high, the cost of living increases, and people may spend less money on non-essential items. This can affect companies’ profits, which may cause their stock prices to fall.

Also Read – What is an IPO in Simple Words? – 6 Important Steps to Know

On the other hand, some companies may benefit from inflation if they can pass on the higher costs to consumers by raising prices.

What is Deflation?

Deflation is the opposite of inflation. It occurs when the prices of goods and services decrease over time. While this might sound good, deflation can be harmful to the economy. When prices drop, people may delay purchases, hoping for even lower prices in the future. This can lead to lower demand, causing companies to reduce production, cut jobs, and even lower wages.

This article is for informational purposes only and should not be considered financial advice. Investing in stocks, cryptocurrencies, or other assets involves risks, including the potential loss of principal. Always conduct your own research or consult a qualified financial advisor before making investment decisions. The author and publisher are not responsible for any financial losses incurred from actions based on this article. While efforts have been made to ensure accuracy, economic data and market conditions can change rapidly. The author and publisher do not guarantee the completeness or accuracy of the information and are not liable for any errors or omissions. Always verify data with primary sources before making decisions.