All you want to know but never asked about the stocks and options markets.

domingo, 7 de septiembre de 2014

What is an initial public offering, or IPO?

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An initial public offering, or IPO is when a company sells its shares to the public for the first time. An IPO occurs in the primary market. Before the IPO, it was a private company, but now the company is allowing the public to participate in their growth and profits. In return, the company can raise money by selling its parts. 

To expand their business, increase their inventory or maintain their operations, companies need to raise money. There are two main ways to raise money: incur debt or sell shares. Debt can be in the form of line of credit, loan from a bank, or the company may sell bonds. Shares can be either common stock or preferred stock.

Shares and debt have different responsibilities, and have different effects on the company.  When a company sells stock, it transfer the right to the ownership of the company to the shareholder, but with debt you maintain control. However, with debt the company have to repay the money, and if your company has financial difficulties, you will have to answer to creditors. With a stock, you never have to repay the money; owners risk their money to participate in the benefits. With debt, creditors do not participate in profits. Many companies do not want to lose the right to property, and therefore prefer debt. Other companies do not have enough credit, or do not want to have debt, and then sell shares. There are also companies that choose to do both.

After the company has decided it needs to raise money and  that it will sell shares, the company must decide whether to sell the shares to private investors or to sell shares in a public exchange such as an IPO.

An IPO allows company owners to raise capital without incurring in heavy debts. It also allows owners to earn some money selling their shares on the market. For a public company, it takes a lot of work and costs a lot of money, because it will have to provide a lot of information to shareholders and comply with federal regulators like the SEC. The IPO process can take over a year, so it also needs a lot of patience.

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