Projects

An initial public stock offering (IPO) referred to simply as an “offering” or “flotation,” is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

Common stock is a form of corporate equity ownership, a type of security. It is called “common” to distinguish it from preferred stock. Preferred stock is a special equity security that resembles properties of both equity and a debt instrument and generally considered a hybrid instrument. In the event of bankruptcy, common stock investors receive their funds after preferred holders, bondholders, creditors, etc. On the other hand, common shares on average perform better than preferred shares or bonds over time.

Common stock is usually voting shares, though not always. Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company’s board of directors. Some holders of common stock also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering. There is no fixed dividend paid out to common stock holders and so their returns are uncertain, contingent on earnings, company reinvestment, and efficiency of the market to value and sell stock. Additional benefits from common stock include earning dividends and capital appreciation.

An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list.

Benefits of being a public company-
• Bolster and diversify equity base
• Enable cheaper access to capital
• Exposure and prestige
• Attract and retain the best management and employees
• Facilitate acquisitions
• Create multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.