- Not every company is publicly traded, so you may not easily be able to buy shares of their stock.
- A company must go through a process called an Initial Public Offering, or IPO, if they want their shares to be publicly traded.
- Most companies decide to go public when they want to generate cash for the business to fund new projects or ventures.
Taking a Company Public
Oftentimes, investors decide to purchase shares of stock of specific companies or corporations. If the shares are listed on a stock exchange and can be easily purchased, then the company is publicly traded. This means that anyone with an investment account and the required funds can place a trade to buy a share of that company’s stock. However, most companies start as a private venture when they are just beginning and do not go public until later down the road. Even now, some large corporations are still privately owned, so going public is not a requirement for a company to be successful.
Preparing for an IPO
In order to offer publicly traded shares, the company must go through a process called an Initial Public Offering, or IPO. There are a handful of additional requirements and regulations that must be complied with once going public, so this is not a decision that companies take lightly. The decision to go public will include the sale of their company stock, which will generate cash to provide funds for new projects or ventures. If a company believes they are large enough to handle the regulations, attractive enough for investors to purchase, and in need of liquid cash, they may decide to pursue an IPO.
Benefits and Drawbacks of Going Public
The IPO process will begin with the company reaching out to a bank to perform underwriting. This will involve a deep dive into the company’s financials in order to ensure they are strong enough to be sold to the public. This analysis will also help determine how many shares should be offered and what the initial share price will be. The underwriters will also help draft legal documents needed to meet federal regulations for the initial offering and ongoing trading. This process can be expensive, which is another reason why this decision should not be made lightly. But once the stocks are public, the company may begin to see the benefit and generate the desired cash for the corporation and existing shareholders.
Alternatives to IPOs
It is much easier to invest in a public company, but it is not impossible to find private opportunities as well. Startups are always looking for investors to help fund their initial efforts, although the risk with these investments is usually much higher due to the future being very uncertain. This process is known as Angel Investing due to the investors being held in such high regard in the eyes of the company. Other private investment opportunities may exist, but they typically require the right connections to arrange the conversations and also a large sum of cash to entice the company to accept the offer. Private companies are harder to value since they have not undergone extensive underwriting, so agreeing on a share or purchase price typically involves a good deal of negotiations.
Speak With a Trusted Advisor
If you have any questions about IPOs, your investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else in general, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Zachary A. Bachner, CFP®
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