IPO stands for “Initial Public Offering.”An IPO is the first time a company introducestheir stock to potential stock investors. An IPO is the first chance that stock investorsget to purchase stock in that company.
An IPO is similar to: A new product being introduced to the public for the very first time such as a new model car, new model computer, or newly built house.
The process goes like this:1. A privately held company wants to expand and needs financing. They decide that stock is one way that they can raise money.2. They determine the amount they need to raise, which will determine how many shares to issue.3. They hire an investment bank to buy and sell shares to the public.4. They sell shares to investment bank.5. The proceeds (funds) from the shares to the investment bank are used by the company to finance operations.6. The investment bank sells shares to general public.
New Stock Offering - IPO Corporation Corporation sell shares to investment bank.Corporation receives cash Investment bank sells Investment Bank shares to investors.from investment bank. Investment Bank receives Investor cash from Investors. At this point the stock is in the market or in the public.
New Car Model Introduced Car Manufacturer Car manufacturer sells new models to car dealer.Car dealer receives new Car Dealer sells new car Car Dealership model to consumer.models. Car Dealership receives Consumer cash from consumer. At this point the new car model is in the market or in the public.
New Stock Offering – IPO (A Second Look) Corporation Corporation sell shares to investment bank.Corporation receives cash Investment bank sells Investment Bank shares to investors.from investment bank. Investment Bank receives Investor cash from Investors. At this point the stock is in the market or in the public.
LOOK AT HOWSTOCK & CARS CHANGESHANDS AFTER THE IPO…
How STOCK changes hands after the IPO… Investment Bank Investor or Stock Broker Notice that the corporation is not in the equation. Stock is sold by investors to investors through an investment bank or stock broker.
How CARS change hands after they are introduced… Consumer Car Dealership Notice that the car manufacturer is not in the equation. The car is sold by consumers to consumers through a car dealership.
Myth: People think that companies receive money from stock after the IPO. This is absolutely not true. The only time companies get money from stock after the IPO is: • when they issue another stock offering • or secondary offering
Let me explain: A company issues 5000 shares to raise $1 million during an IPO. At this point there are only 5000 shares out in the public. After a couple of years the company decides they want to expand so they issue 5000 more shares to raise (secondary offering) another $1 million. At this point they have raised $2 million from two separate stock offerings and have 10,000 shares outstanding....
In Summary:• IPO is the first time a company introduces their stock to the public.• Companies use a investment bank to get shares to the public.• Companies do not receive any money from their stock after the IPO.