A Must Read Basics for Initial Public Offering (IPO)

The dream of most start-up entrepreneur is to get to the stock exchange market one day, probably the New York Stock Exchange (NYSE) and ring the opening bell for a company they founded from scratch. A lot of companies want to go public and start selling shares but before you go further, let me help you with knowing what an IPO as well as explain a few things about an IPO.

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What is an IPO?

It is known as Initial Public Offering, which is a word used for the first set of sales for a stock to the public. When I mean public, I mean it is available to everyone who is interested in buying the number of shares placed for sale in the market.

What happens before a company goes public?

Before a company goes public, it is owned by a person or few individuals often private investors. As a private company is often owned by a maximum of 100 people who have shares in the company based on their level of investments. The people who own shares in a private company could be ranging from 1 -100 but do not exceed that limit. When a company is private, it is mostly invested in by professional investors who do not plan to sell their stakes in the company. As a private company, your revenue numbers is nobody’s business except for your investors. The price of a company’s stock is determined by the last trade agreed by buyers and sellers.

What happens after an IPO?

You become a free bird, everything you do becomes public, unlike days before your IPO when your company value do not fluctuate after the IPO, you see a lot of fluctuations due to the presence of daily traders who do not care about your company’s interest but are interested in making their daily revenue from playing with the buy and sell of the company before the closing bell. When a company is private, valuation can be decided founding investors but when the company is public, the valuation is determined by the market capitalization (Market cap) and the company value is determined by demand and supply. After an IPO, the total valuation of a company is determined by multiplying the stock price by the total number of stocks outstanding.

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Why startups go for an IPO

• To raise money from the public and this money could go up to billions of dollars.
• Making the stock liquid and giving it a real value, so funding investors can cash out their long held shares for liquid cash.
• Credibility is one thing companies need when making deals and being a publicly traded company gives that credibility.

Downside to doing an IPO

• every quarter, as a company you must release financial statement of the company which will either lead to rise a drop in stocks. The management is pressured to do well every quarter.
• There is a lot of oversight and rules to adhere to as a publicly traded company which could be expensive so as to keep public investors money secured.

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Requirement to list on an exchange

• Build a strong company with a great product
• the company needs to experience growth on a yearly bases as the public will look at all this.
• The company needs to have enough revenue as well as must have made profit.
• Your company must be predictable based on products. Investors like to predict the future and if your company isn’t worth the bet, then it is not worth going on an exchange.

After giving you a very good explanation about IPO, if you really want to ring the opening bell for your company anytime soon, then you need to work on your company to make it better and worth listing.