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What Is a New Issue?
Let me explain what a new issue is: it's a stock or bond offering that's made for the first time. You see, most new issues come from privately held companies that are becoming public, and this presents you with new investment opportunities.
The typical way for a new issue through a stock offering is what's known as an initial public offering, or IPO. That's where a company's stock is offered to the public for the first time on exchanges like the New York Stock Exchange (NYSE) or Nasdaq. New issues of bonds work similarly. In both cases, the goal is to raise capital for the issuing company.
You can contrast a new issue with a seasoned issue, which is an offering from a company that's already public.
Key Takeaways
- New issues, whether stocks or bonds, are a means of raising capital for a company.
- New equity shares are often issued via an initial public offering (IPO), allowing investors to buy the stock of a previously private company for the first time.
- Bonds, preferreds, and convertible securities may also be disseminated as new issues to raise debt capital for a firm.
- Bonds as new issues are considered a form of debt financing, while stocks and IPOs as new issues are considered a form of equity financing.
- Investors should be aware of the 'hype' surrounding a new issue like an IPO, as it could go one way or the other.
- Companies that are already public can make a new issue through a secondary offering.
Understanding a New Issue
A new issue is how a company raises capital. Firms have two main choices: issuing debt, which means borrowing, or issuing equity in the form of stock, which means selling a portion of the company.
No matter which path they choose, when those securities are offered for sale, it's a new issue. Governments do this too, creating new issues of sovereign debt like Treasury securities to fund operations.
If they go the debt route by issuing bonds, the new issue gets scrutinized based on the issuer's creditworthiness and financial strength. For a startup with no revenue, issuing bonds might not be an option.
There's a risk of 'hype' around a new issue, sometimes causing a company's shares to surge after its IPO and then plummet once the hype fades. You need to be careful when investing in new issues.
But the stock route might still work if they can convince investors of the company's long-term potential. That's where venture capital and private equity firms come in, helping the company grow in exchange for ownership.
If things go well, the company might then do a new issue through an IPO and go public. Already public companies can issue another new issue later via a secondary offering.
Example of a New Issue
Consider a new IT company that's developed a program for easy worldwide cash exchanges. It's been successful in generating revenues and attracting venture capital interest. To grow, it needs more capital—about $30 million—which it doesn't have.
The company works with investment banks to figure out what their shares might be worth on the open market. The banks' underwriters suggest $19 per share as a fair IPO price, valuing the company at just under $100 million.
The board agrees to list shares and files for an IPO, releasing shares worth half the total valuation, so $50 million. With this new issue, the company raises capital and gets listed on a stock exchange where shares can be traded freely.
In the end, the new issue brings in $50 million, a bit more than the $30 million needed for growth. Since not all shares were listed, the company retains significant ownership.
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