IPOs are a way of publicly raising money for companies in the equity market. Companies allocate some of the total shares😎 in the company to the public and divide the rest amongst the current shareholders. Companies will appoint an investment banker(or if the IPO is big enough then multiple investment bankers) to help them with an IPO based on their experience with IPOs. Investment bankers will know how to price shares by going out and drumming up demand for the business.
Investment bankers essentially put up the money for an IPO and buy the shares from the company after which they sell them on to the initial public before listing them on the stock exchange.🎈
These initial investors are offered the shares at an initial price and will be obliged to buy it on the first date of opening just before the shares go to the general public. The investment banker gets a commission to introduce the companies shares to new investors and manage the initial public offering. The sale of the initial shares to the first public investors is the first step in an IPO, these investors are known as the primary market.🌐
After the initial public offering is done to the primary market(pension funds, mutual funds, hedge funds) the investment banker will then list the shares on the stock exchange where the shares can then be purchased by ordinary investors.👨💼
IPO share prices tend to rise once the stock hits the stock exchanges but this isn't always the case. If the pricing has been overvalued by the investment bankers then the share price will usually correct once hitting the public market.
Why do companies go public?🤷♀️
- Going public give you much better credibility
- Going public helps you raise money you can use to invest, hire more people and buy out competitors.
- Going public is a way to reward the initial founding employees and founders whose shares might increase in value.
- Going public helps raise brand awareness and could potentially secure more business from partnerships of customers
- Going public helps companies attract the best qualified staff
What happens when a company is public?🎉
When your company is public this means it is now owned by public investors who you are now accountable to.
Publicly traded companies are subject to oversight by the appropriate regulatory body in the country.