Five things every leader should know about the stock market

The stock markets provide a mechanism for companies to raise capital. It can be a long-term source of capital for companies by offering bonds or shares for sale to the public.

Mihail Ion (photo), chairman of Raiffeisen Asset Management, shares his views from the standpoint of an institutional investor with funds under management holding minority equity stakes in public companies that can yield profit from the growth of market value and dividends/bond coupons without being involved in the way the company is managed.

Equity offering brings immediate proceeds to the company, which can be used for growth and expansion, retiring existing debt and improving financial indicators for favorable financing terms.

“A possible sale of the entire business is much easier for a public company. The only disadvantage consists in the fact that the holding in the company is diluted, and hence the impact of the development on equity offering must be assessed so as the growth of the company’s potential to offset the dilution of the capital”, said Ion.

However, an equity offering doesn’t bring proceeds without an opportunity cost, as shareholders expect a rate of return comparable to the risk level. The cost of capital is therefore higher than bond interests or bank loans.

On the other hand, bond offering is an alternative to borrowing from a bank on a long term, and could be the source of choice for raising capital especially now, when lenders are more cautious when granting loans.