Securities: Publicly Traded Companies

Publicly Traded Companies: What You Need to Know

Getting Started

So, you want to learn about publicly traded companies? We got you covered, fam! When a private firm decides it wants to raise capital from a wide range of investors, it may decide to go public. This means it sells its securities to the general public and allows them to freely trade those shares in established securities markets.

The first issue of shares to the general public is called the firm's initial public offering or IPO. Later on, the company may go back to the public and issue additional shares, which is known as a seasoned equity offering. It's like when Apple drops new shares of stock, that's a seasoned new issue, you feel?

These public offerings are usually marketed by investment bankers, or as we like to call them, underwriters. They advise the firm on how to sell the securities and form an underwriting syndicate to share the responsibility for the stock issue.

The IPO Game

Shelf Registration

Let's talk about a cool innovation in the securities game called shelf registration. This was introduced in 1982 and allows firms to register securities and gradually sell them to the public for up to 2 years following the initial registration. It's like having securities "on the shelf," ready to be issued. No extra paperwork and the ability to sell in small amounts? Sign me up!

Initial Public Offerings

Now, let's dive into the exciting world of initial public offerings or IPOs. This is where investment bankers take charge and manage the issuance of new securities to the public. Once the SEC has commented on the registration statement and a preliminary prospectus has been distributed, it's time for some road shows.

During these road shows, investment bankers travel around the country to generate interest among potential investors and gather intel on the price at which they can market the securities. It's like a mix of a concert tour and market research, all rolled into one. Talk about multi-tasking!

Investors show their interest in the IPO through a process called bookbuilding. The investment bankers poll potential investors and create a book that provides valuable information to the issuing firm. This helps set the offering price and the number of shares offered based on feedback from the investing community. It's like getting insider info, but totally legal!

But why would investors truthfully reveal their interest in an offering? Well, in this case, truth is rewarded! Shares of IPOs are allocated based on the strength of an investor's interest. If you want a large allocation, you gotta show your optimism. And hey, IPOs are often underpriced compared to their market value, so it's a win-win situation!

The Ups and Downs of IPOs

Now, let's talk about the pricing of IPOs. It's not always a walk in the park, and not all IPOs turn out to be underpriced. Some even face disappointment, like Facebook's 2012 IPO. Within a week, its share price dropped below the offer price. Yikes!

Interestingly, despite their attractive first-day returns, IPOs have been poor long-term investments. They tend to underperform the broad stock market and comparable portfolios of other firms. But hey, that doesn't mean you should count them out completely. There's always some risk and reward involved, right?

Oh, and did you know that sometimes underwriters are left with unmarketable securities? They end up selling them at a loss on the secondary market. Therefore, the investment banker bears price risk for an underwritten issue.

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