What is an IPO
The first time any company sells its stock of shares to the public is known as Initial Public Offer (IPO). A company can issue shares either on debt or equity, if a company has never issued any equity to the public then it is called initial public offer. Usually a company falls into two classes either public or private; the latter has very few shareholders. Here the stake holders need not disclose all the information.
Generally it is not possible to purchase shares from a private company. All one can do is to approach the owners about your interest in investing in the company, then also they may not wish to sell anything. But this is not the case with public companies; they would have already sold a portion of their shares to the public and would have started trading with stock exchanges. This is we’re doing an initial public offer is often referred as “going public”.
Once the company’s shares are listed with reputed stock exchanges it carries a certain amount of reputation with it. Now a day’s company’s don’t need strong financial to go public, instead initial public offerings are done by even smaller startups to establish their business. An initial public offer is just selling the stocks of the company; if the owners can convince the public to purchase their shares then they can raise the necessary capital to start business.
Here a question arises as to why should the company go public. Going public not only raises the necessary capital but also helps in gaining financial stability. The other advantages of going public are:
- Public companies are subject to scrutiny which is very strict; because of this they get good rates when a debt is issued.
- If the company can hold on the market demand for many years they can issue more stocks. With this they can also encourage acquisitions and mergers since they can invest this money for better deals.
- Going public helps the company to maintain liquidity that helps a firm to execute plans like employee stock option programs.
An initial public offer is done with a process called underwriting. When a company wants to go public it hires an investment bank first. Underwriting is a process of raising a debt or money. These underwriters act as brokers between the company and the public through an investment bank in raising the money or debt. Examples of underwriting companies are Goldman Sachs and Morgan Stanley that are considered the biggest of all.
The company and the investment bank will discuss about the volume of money to be raised. Not only this but also the types of shares that can be issue to the public. Here the underwriter agrees to sell the shares of the company but they do not guarantee the amount raised. All these discussions will be in black and white called firm agreement.