Securities: Publicly Traded Companies

Publicly Traded Companies

What does it mean to go public?

When a company decides it wants to get money from a lot of different people, it can decide to go public. Going public means the company sells parts of itself, called shares, to regular people like you and me. These shares can then be bought and sold in special markets where people trade them.

How does a company sell shares to the public?

When a company sells shares to the public for the first time, it's called an "initial public offering" or IPO. It's like when a company has a big opening party to invite everyone to buy shares. Later on, the company can decide to sell more shares to the public, and this is called a "seasoned equity offering."

Who helps the company sell its shares?

When a company wants to sell shares to the public, it gets help from special bankers called investment bankers. These bankers are like helpers who know a lot about selling shares. They tell the company how much the shares should be sold for and how many shares to sell. The investment bankers also talk to other people who might want to buy the shares.

What is a registration statement and a prospectus?

Before a company can sell shares to the public, it has to fill out some paperwork and get permission from a government agency called the Securities and Exchange Commission (SEC). The paperwork is called a registration statement, and it describes the company and its shares. When the SEC approves the registration statement, it becomes a prospectus, which is like a special book that tells people about the shares and how much they cost.

How do investment bankers sell the shares?

Once the company has the prospectus, the investment bankers buy the shares from the company and then sell them to regular people. They sell the shares for a little bit more than what they bought them for so that they can make some money too. This is called a "firm commitment." Sometimes, the investment bankers also get some extra shares or other things from the company as a reward.

What is shelf registration?

In 1982, a new rule was made that allows companies to register their shares and sell them to the public over a period of two years. This is called "shelf registration." It's like having a shelf in a store where you put things to sell them whenever you want. This makes it easier for companies to sell their shares quickly without too much paperwork.

What happens before an IPO?

Before a company has its IPO, the investment bankers go on a tour to different places to tell people about the shares. They want to get people interested and excited about buying the shares. This tour is called a "road show." The investment bankers also talk to big investors and ask them if they want to buy the shares. This helps the company know how much people are willing to pay for the shares.

Why do investors tell the truth about buying shares?

When investors are asked if they want to buy shares, they should tell the truth about how much they want to buy. This is because if they are honest, they might get more shares. The company wants to give more shares to people who really want them. So, if someone says they are very interested, they might get more shares. This is why companies sometimes sell shares for less money than they could actually get for them.

What happens after an IPO?

After the company sells its shares to the public, the price of the shares might go up a lot. This means the shares are worth more than what people paid for them. But sometimes, the price goes down, and the shares are worth less than what people paid. It's like when you buy a toy and later find out it's not as fun as you thought it would be. This is why it's important to be careful when buying shares.

Are IPOs always a good investment?

Sometimes, people think that buying shares when a company has its IPO is a good way to make money. But it's not always true. Some companies don't do well after their IPO, and the shares end up being worth less than what people paid for them. It's like when you buy a new game, but it turns out to be boring. So, it's important to be smart and do some research before buying shares.

This article takes inspiration from a lesson found in FIN 4504 at the University of Florida.