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Do terms like “initial public offering” or “going public” confuse you? Have you wondered how companies get listed on the stock market? Then look no further! This article covers all the IPO basics that you must know.
An initial public offering (IPO) is the gateway to becoming a publicly traded company. It is important first to understand that a few primary owners can fully own companies or be owned by the general public and these primary owners together. Most young companies are bootstrapped, meaning their founders privately own them, maybe a few family members or even some employees working for a long time.
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Making a company’s shares accessible to the general public means making them part investors. Before a company’s shares are made open to the public, it is known as a private company. Most private companies go public in a bid to raise more capital. Alternatively, public investing in an IPO can be a quick way to benefit from the company’s profits.
Can any company “go public”?
Simply put, yes- any company can go public, if it meets all criteria of the stock exchange that it plans to get listed on. A company is deemed ready to go public when it is prepared to make an initial public offering of stock. Companies decide to go public when they earn profits and capital returns.
However, IPOs have become a modern-day fad, with companies mistaking the concept as a fast way to garner headlines and obtain share price gains. While an IPO may offer considerable monetary gains to a company, it has many challenges that make it an expensive and time-consuming process.
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Companies planning to go public must have proper financial and legal paperwork ready that can make them fully prepared for public scrutiny. This compels many private companies to hire an underwriter, which can be an investment bank, to do the paperwork for them. Underwriters also engage with potential investors and schedule meetings with them, referred to as roadshows.
How does a public company sell its shares?
There are two main ways through which a company can make its shares open for investing:
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Fresh issuance of stock – Companies may issue new stocks, which can be publicly traded. This can help generate new jobs, and the proceeds are flown into the company.
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Selling existing shares – This is the resale of existing shares among the public. These existing shares come from existing shareholders in the company.
Why do companies go public?
Some of the basic reasons for which a company files an IPO are:
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Improving company valuation -Unlike a public company, evaluating the share price of a private company can be a huge ordeal. Before an IPO, assessing a privately owned company's shares means taking a guess based on the available information and competitors’ performance. The way publicly listed competitors perform forms of basis for calculating their worth. However, when the public element comes into the picture, the stock may significantly rise in value.
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Transparency: IPOs can be a complex and vast field to navigate. Understanding whether an IPO is the right choice for you means being well-versed with the various intricacies of the process, such as everything a company does having to be declared at the stock exchange.
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Increases Liquidity: Long-term employees and private equity investors holding positions in the company get a platform to liquidate their stake partially or fully. Once the shares are listed, they are easily tradable and have more markets to explore.
Limitations attached with filing an IPO
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Expensive process
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A lot of time needs to be invested
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Regular regulatory filings are compulsory
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Entrepreneur loses control over the company
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