Have you ever heard that a company is ‘going public’ or announcing an IPO?
Here is what that term means.
IPO: When a company goes public
Going public is shorthand for something called an initial public offering, or IPO. An IPO is the first time a company sells its shares to the public through a stock exchange such as the Nasdaq or the New York Stock Exchange (NYSE).
When a company wants to open new stores, build or acquire a factory, or expand in some other way, it may need additional resources to pay for it. Company executives may use an IPO to raise additional capital to invest in and grow their business.
Often a company does not yet have enough internally generated funds to finance such projects. Going public is one way to raise a relatively large sum of money in a relatively short period of time.
Which companies have gone public?
The short answer: most large companies you’ve heard of, and any companies whose stock you can purchase as an individual investor. If you’re investing on Stash, you’re investing in companies that have gone public.
How does a company ‘go public?’
To ‘go public,’ companies must hire an investment bank, such as Goldman Sachs, or J.P. Morgan to help conduct the process, also known as underwriting. These banks are responsible for everything from preparing the legal documents to finding investors to buy the initial shares or as so banks refer to IPO shares.
Once all parties involved in the process have coordinated their efforts, they decide on the date the company will have its IPO.
Have you ever seen people clapping and smiling in the news, after ringing the opening bell of the NYSE? Many times, that’s the celebration of an IPO.
That moment is also the first time a company’s stock trades in a major public stock exchange, which is usually a big milestone for the business.
It’s not all balloons and clapping and bells. When a company is publicly traded, there are also significant legal requirements it must follow.
The company must first register with something called the Securities and Exchange Commission (SEC). The SEC is a federal agency that regulates the company and lets them know what rules they must follow in order to get listed on a public stock exchange. One rule is quarterly filings of financial statements, so investors have a current and regularly updated picture of the company’s fiscal health.
Getting listed on an exchange
Stock exchanges such as the NASDAQ publish lists of companies that have recently issued, or soon will issue, shares for sale to the public. This IPO list can be found here.
Fun fact: Ever wonder how companies choose their ticker symbols? For more on how these letters are chosen and regulated, check out: How to Read a Stock Ticker: A Quick, Fun Guide.