The beginning of common stock starts with an initial price offering (IPO) by a privately held company. There are many steps involved with becoming a publicly traded company. As with any decisions that a firm makes, there are both advantages and disadvantages of going public vs. remaining private. Some of the advantages including a much greater access to capital, attracting top talent by being able to offer stock options, and enlisting in the stock market acts as a huge marketing event for the company. “A company usually decides to IPO because it provides access to capital to fuel growth and liquidity for founders and investors and also because it provides the public market’s unofficial stamp of approval” (Wasserman). A public company can much easier acquire new firms but also provide value if some other firm chooses to acquire the company. There are also some disadvantages of going public including loss of control over the company by management and founders, additional reporting to the SEC which can very costly, as well revealing sometimes sensitive information as requested by the SEC.
A company deciding to IPO first has to take into account certain exchange listing requirements as securities laws. Both the NASDAQ and NYSE require a company’s pretax income to be t a certain level. The NYSE requires either $2.5 million before federal income taxes for the most recent year and $2 million pretax for each of the preceding two years to IPO. However, the NASDAQ only requires $1 million in pretax income in the latest fiscal tear of in two of the last three fiscal years to enlist. The NASDAQ also follows suit with the Securities Exchange of 1934 to registers. “This act requires publicly held companies to disclose information continually about their business operations, financial conditions, managements” (IPO Basics). There may also be state rules that a company has to abide by before enlisting in the NASDAQ.
In order to become a public company, there are many steps to take which can take a large portion of time. However, that should be a deterrent to becoming public. To begin, proper management teams need to be in place to take on the hefty task of becoming public. It is also important that the company’s board of directors is independent of the company as to comply with rules. The financial team also needs to make sure that they conform to the rules of the Sarbanes-Oxley Act. Next, the firm needs have a “beauty contest”, in other words, they need to attract investment bankers wisely that can provide sufficient research analysis for the company. They also need to be knowledgeable of the nature of the business and industry. The first principal offering is the prospectus, which can take several weeks to prepare and file with the SEC. Next, complete the registration and review, as well as file the initial listing application. Senior managers will now begin to meet with prospective investors, on the road show, with the hope of building a book for the underwriters so the IPO can succeed. After the road show, the IPO needs to be priced. This usually occurs after the close of the markets on the final day of the road show and stocks will begin trading the next morning. Finally, the IPO will typically close on the 4th business day after the pricing and the issuer and any selling stockholders will release shares to the underwriters.
There are many types of common stock available ranging from conservative to unpredictable. Here a few types of available common stock:
1. Blue chip stocks are stock offerings of the largest and most prestigious companies. Most of these firms do not have potential for further substantial internal growth, as well won’t be going out of business anytime soon. An advantage to blue chip stocks is that they rarely have to raise additional capital and generate excess cast. With this excess cash, the firms will generally pay dividends to their shareholders.
2. Income stock, which are appealing