Business Essentials

What You Should Know About Initial Public Offering

An initial public offering is the first public sale of shares of a joint-stock company, including in the form of sale of depositary receipts for shares, to an unlimited number of persons.

Why Is There an Initial Public Offering?

Listing on the stock exchange makes the company famous, gives status, and most importantly – opens access to capital. How is the initial public offering on the stock exchange and should investors invest in an IPO? The formation of corporate law, the aggravation of competition are forcing Russian companies to look for new sources of attracting financial resources to develop their business. In this regard, more and more companies are turning their attention to the possibilities of the public market. This tool is still in its infancy.

The initial public offering is an initial public offering of shares of companies on stock exchanges, carried out in order to raise equity capital. To make a profit for a block of shares put up on the stock exchange, you need to choose a favorable moment to enter the stock exchange. By purchasing part of the shares of companies, shareholders become co-owners of the companies.

Each company seeks to raise capital to develop its business. At the initial stage – at the start-up stage – it is difficult for her to attract a bank loan or find an “angel” who is ready to invest in her development. And then the company issues shares that are offered to investors. Anyone who buys a share in a startup becomes its co-owner.

The purpose of the initial public offering is to attract additional capital to the company, improve the company’s image, as well as assess the quality of management and work of the company, the opportunity to increase income from the company’s existing shares by buying and selling part of these assets by investors, receiving dividends, in some cases the ability to reduce the risk of company capture by raiders.

From Private to Public: the Most Important Things to Know About

The first public offering of shares on an exchange is called an initial public offering or IPO. The main purpose of the IPO is to raise additional capital for the further development of the company. As a rule, a company that decides to place its shares on the stock exchange enters into an agreement with an underwriter who actually deals directly with the sale of shares.

There are several main goals for conducting an IPO, the importance of which may vary depending on the specific case:

  • Raising capital in a company: An IPO allows a company to access the capital of a much wider range of investors.
  • The presence of shares traded on the capital market provides the most objective assessment of the company’s value, which can be used as a tool for assessing the activities and motivation of managers, or a benchmark for mergers and acquisitions.
  • Shareholders of the company get the opportunity to sell all or part of their shares and thereby capitalize on the expected future earnings of the company.

The preliminary stage of the initial public offering is the longest, it can last from several months to several years. During this time, the company must assess its business, asset structure, and corporate governance. Then you can calculate at what price and how many shares should be issued and, accordingly, determine the future capitalization of the company.