When a company issues stock for the very first time, it is called going public. In order to take a company public, and make it possible for investors to purchase stock, the management of the company has to make an initial public offering. the road to public ownership begins with an entrepreneur coming up with an idea for a product, or service to sell, and then launching a start up business. if the company grows the entrepreneur can obtain funds for expansion in the private equity market. The private equity market is where sophisticated investors have assembled pools of money, that is referred to as venture capital. This is money that these investors have set aside to risk on new business ventures in exchange for a say in how the company is run, and a share of the profits.
Once a company finds that its products or services are in demand, it quickly finds out that the ability of the venture capitalists to provide the necessary money that is needed for the rapid growth that is taking place is extremely limited, and this is when the company decides to go public. First they find an investment broker that will agree to underwrite the stock offering. Then the underwriter help the company prepare a prospectus. The prospectus is a legal document that is made available to anyone that is interested in investing in the company. A prospects provides a detailed analysis of a company's financial history, its products or services, and its management's background and experience. It also outlines the various risks that a company faces.
In-order to attract investors, a press release is issued in the financial press announcing the proposed stock sale. Sometime underwriters will organize meetings between the company's management and large potential investors. The day before the actual sale, the underwriters establish the price that they will pay for each share. This is the amount of money that the company will receive from the stock sale. When the stock is traded the next day, the price can rise or fall depending on whether or not investors agree or disagree with the underwriters valuation of the new company.
If a company has already issued shares, and they want to raise additional money, through the sale of more stock the process is called a secondary offering. Most company's are wary of issuing more stock, since it will de-value that it has already issued usually a company will only issue new stock if their current stock price is high. This help to minimize complaints from existing shareholders that their shares are being diluted. Also if a company thinks that its shares are too low, they will buy some stock back to boost the price of the remaining stock.
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