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What Does Mean for a Company to Go Public?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 August 2014
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When a company is said to “go public,” it is releasing privately held shares for sale to members of the public for the first time. Private companies are held and controlled by a limited number of shareholders, such as members of the same family. Public companies have shares available for purchase by anyone, giving members of the general public an opportunity to own a share and have a vote in company decisions. The process of going public is lengthy and requires a number of steps. Private companies are often scrutinized for signs that they may be on the verge of going public.

Companies usually decide to go public because they are in need of capital. By selling shares, a company can access a ready source of financing. Going public can facilitate expansion, project development, and other endeavors on the part of the company. It also creates risks, as having publicly traded shares can make companies vulnerable to takeovers, as well as other decisions made by stockholders, like ousters of board members.

Also known as an initial public offering, the process of going public usually starts when a company identifies the need for capital and locates an underwriter. Underwriters are firms that agree to buy the offering, typically at a discounted rate, for resale to the public. The underwriters participate in the process of deciding when to make the announcement and how to promote the initial public offering, with the goal of selling the stock offering as quickly as possible.

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The decision to go public does not force a company to put itself entirely up for sale. Companies can decide on the percentage of stock they want to release to members of the public and they can make additional offerings later, if necessary. Once the stock is sold in the initial public offering, it enters the secondary market, where individuals trade stock with each other. Companies do not get a share of the profits from sales on the secondary market, although they can benefit from increased stock values. Having valuable stock can make it easier to access financing and other needs.

A company chooses the timing of a decision to go public with care. Financial markets are notoriously volatile. Selecting the wrong day to release a stock offering can result in a disaster for a company. Even the most careful planning can go awry if events intervene to depress or confuse the market on the day a company has scheduled to go public.

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Discuss this Article

anon328328
Post 3

I am about to write a master's thesis on this subject. I want to identify how SMEs can manage the organizational change caused by an IPO. Is there anybody who can tell me in which points the organization of an SME experiences the greatest changes/challenges? Thank you guys for any hints!

Testy
Post 2

I think there are several benefits to companies going public. The most important is a greater public interest in the company, which will certainly help the company out in the long run.

When a company announces that it has made the decision to sell shares on the market, they receive a lot of attention. This attention is usually positive when coming from the average consumer. People will start to take a greater interest in the company when they purchase stock from it. They figure that because the company decided to go public, that business might be going well, which might not necessarily be the case.

This growing interest leads to greater sales. Sales lead to company growth, which increases the value of the stock. When the stock increases, even more interest grows in the company, and the cycle continues.

YogurtPark
Post 1

I took a class in personal finance while in college. My professor lectured on the stock market and initial public offerings. He did not go into the as much detail as you did, so thanks for writing the article.

I would like to add a piece of advice that my professor gave me. He said that IPO's are usually overpriced, so never buy a stock when it first comes out on the market. The company has to pay back all the legal and underwriting fees when making their initial public offer, and this cost is reflected in the original price per share.

Instead, wait for the shares to come down in price, which they inevitably will. If you do this, you can by more shares at a cheaper price, which will give you a greater return on your investment. The stock market is a game, so you have to play in right and at the correct time.

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