We went over the news about Facebook going public. We looked at some interesting numbers and how much money Facebook makes. One thing that we didn’t go into detail on is what gong public is all about. What does it mean when companies go public?
When a company goes public it releases an IPO (Initial Public Offering). I realize that this isn’t the most exciting opening to a post. If you want to know how the stock market works, you’re going to want to know what going public means. Let’s get started.
Why would a company go public?
Companies go public usually to have access to more money. There are two ways to get more money. The two ways that a company can raise funding are through selling bonds or selling shares. The problem with selling bonds is that the company has to pay interest on the money borrowed and it has to pay all of the money back. This is why many companies (WWE, Google, Facebook, and so on) have decided to raise money through selling shares.
The shares in any company will be private at first. When you incorporate your business, you decide how the shares are distributed between the original owners or partners.
Then when the owners want some money they decide to sell a portion of their ownership to raise cash for the business.
Why does the company want more money? Why would Facebook go public to get more money?
- New investments.
- New innovations.
- Build up savings.
Also to be realistic, the company is going to want the money for a new project.
Are there any negatives to going public?
Going public to raise some money isn’t always going to be totally positive. There are many negatives to going public with your business.
The obvious issue is that the owners can no longer treat the company like their own private business. The company is now accountable to shareholders. The company needs to have quarterly calls where they need to explain actions and moves. The business can no longer get away with doing whatever it wants to do. The owners must always consider shareholders if they want to thrive.
The next negative of going public that none of the information is going to be private anymore. This ties into the previous point. What the business does is going to be public information. This can be good when things are booming. This can be a huge negative when the company has bad news that it wants to hide.
You’re also going to have to spend a fortune for the SEC filings and for everyone involved in the process. Going public and releasing an IPO isn’t going to be a cheap process.
How’s the share price determined?
This is where things get a bit complicating, especially for those that want to play the stock market. What happens is that a group of underwriters will work on all of the legal and financial documents provided to them. They’ll look at the companies ability to able to make a profit compared to other companies in the same field. They’ll looked at some very detailed numbers, figures, charts, and all of that fun stuff. Eventually after a few months or more, the company will be ready to go public at the suggested share price.
How can you buy shares?
The truth is that buying an IPO on a hot stock is pretty challenging for the average person. After plenty of research I decided to go straight to the source. According to the official website of the U.S Securities and Exchange Commission:
No brokerage firm can guarantee you will be able to purchase shares in an Initial Public Offering (IPO).
Long story short is that you’re better off and are usually limited to waiting a few months to purchase shares on the stock market like everyone else in that hot IPO that you wanted to get in on.
That’s what going public is all about.