In order for a company to build their business, many pursue to either merge with another company or acquisitions from another company. Another option a company should consider when building their business is to make an Initial Public Offering. An initial public offering is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity (Know Finance., n.d.). Microsoft, Apple, and Samsung have stepped into the stock market by their IPO. These strides are what it takes to raise money and what roles help the company begin an IPO.
Most corporations agree to an initial public offering with an investment banking firm by acting in the capacity of an underwriter. An investment banker is a person who works in a financial institution that primarily goal is to raise capital for companies, governments and other entities (Investopedia, n.d.). An underwriter is a person that provides several financial services that includes helping with assessing the value of shares and establishing a public market for first sales (Investopedia, n.d.). An underwriter responsibility is allotting securities issued to the public. There are several risks that are involved in a public offering. Initial public offering stocks is one of the risks involved in public offering (“Financial Web”, 2014). This is sometimes called going public because the stock is offered first to the public.
Share, the risks of the company, can sometimes be profitable, but a risk too. An investor, shareholder, or individual may be at risks if they invest their money within a company that is going public for the first time (“Financial Web”, 2014). Pricing of good is one of the risks that are involved in a public offering. Pricing goods too high or too low is not acceptable in the public offering. Investors and shareholders will not invest in a company if there are any issues with the pricing. A firm and their investors will lose money their money if the price of goods is priced too low. This may cause investors to pull out of the firm corporation (“Financial Web”, 2014). Loss of income and revenue may sometimes make the underwriters hold the inventory and additional funds.
Long holding period and lack of information are other risks that are involved in a public offering. Lack of information may cause investors to pull out of the firm because the firm failed to provide all of the documents and files. Long holding period may cause a decrease in stock price. The U.S. Securities and Exchange Commission (SEC) protects the investors, maintain fair, efficient markets, orderly, and facilitate capital formation (“Bridge Capital Inc.”, 2014). The SEC deals with industries by monitoring, managing the terms of sales by preliminary prospectus and setting rules and regulations for companies. Preliminary prospectus is when the company and the securities are issues to the firm. A firm will have provided their income statement, balance sheets, its current activities, and other documents that provide information about the firm. The Litigation Reform Act of 1995 (PSLRA) was put in act to increase the success in private litigation for securities fraud.
Initial Public Offering (IPO) | Know Finance. (n.d.). Retrieved from http://www.knowfinance.com/ipo/ Investment Banker Definition | Investopedia. (n.d.). Retrieved from http://www.investopedia.com/terms/i/investmentbanker.asp Underwriter Definition | Investopedia. (n.d.). Retrieved from http://www.investopedia.com/terms/u/underwriter.asp Financial Web. (2014). Retrieved from http://www.finweb.com/investing/therisksofinitialpublicofferingstocks.com Bridge Capital Inc. (2014). Retrieved from http://bridge.com