Series 7: Chapter Twelve

Chapter Twelve

Issuing Securities and the Primary Market

When a business wants to raise money in the securities markets, it has two basic choices: issue debt securities or issue equity securities. For most businesses, issuing debt is the preferred choice, since issuing debt means you don’t have to give up ownership or control. Issuing debt securities means you are essentially borrowing money from investors by selling them IOUs called bonds and notes. Debt securities consist of principal (the money invested) and interest. However, unless you’re a big and established business, issuing debt securities—also called debt financing—may not be an option. The reason: it’s hard to get investors to buy the debt securities of smaller or newer businesses, especially if there are no substantial assets or collateral with which to secure the financing. When debt financing is possible for smaller businesses, it can be expensive (investors may require high interest rates) and investors may demand restrictive covenants and terms, for example, limiting the freedom of the business to spend money. Also, the amount of debt financing possible may be insufficient for a growing company’s needs. This is why smaller and younger companies issue equity to finance their business. In return for gaining access to a much larger pool of money, issuing equity means selling shares of stock and relinquishing some ownership and control. Buying an equity security means purchasing ownership. Equity securities include common stock, preferred stock, and warrants, which offer investors different rights a