Stocks also known as “shares” or “equity” allow you to buy a certain percentage of ownership of a public company trading on the stock market. When a private company is looking to go public, they must do an initial public offering where they offer shares to the public. The number of shares that you buy would represent a claim on the company’s assets and earnings.
When you purchase shares of a public company, you’re known as a shareholder. As a shareholder, you’re eligible to participate in the company’s profits through pay out of dividends plus you’re eligible for voting rights.
Listing on the Stock Market
Private companies become public companies when they list on the stock exchange. A stock exchange is a marketplace for trading securities, commodities, derivatives and other investment instruments. There are multiple stock exchanges and before a company decides to “go public”, they must meet listing requirements of the exchange that they’re listing on.
Example: NASDAQ and New York Stock Exchange have listing requirements that a company must meet before they get approved. Some of the requirements include: shares outstanding, company value, initial share price, number of shareholders and more!
Initial Public Offering (IPO)
When a private company is looking to go public, they must do an “IPO” also known as an “initial public offering.” During this process, the company will be looking to sell its private stock to the general public.
As a company files for a initial public offering, regular investors are allowed to buy shares of the company that was once private. Public companies face strict rules and regulations. For example, they must have a board of directors, report their financial information every 3 months and must make sure that inside information is not communicated to the general public.
Advantages of “Going Public”
Going public has various positive advantages for a company. Some of the advantages include:
- Raise Cash – By going public, companies are able to raise cash through the sale of shares. Companies can use this cash to expand their operations and aim for growth.
- Public Image – Listing on a major stock exchange has a level of prestige that comes with it. Public companies are more well known than private companies.
- Credibility – Before a company goes public, they must meet various requirements – revenue, shares outstanding, initial share price, balance sheet, etc. These strong requirements provide a public company with greater credibility than a private one.
- Access to Capital – Due to the increased scrutiny, private companies are able to get better financing rates.
- Human Capital – Public companies are allowed to issue shares and encourage employees to participate in stock ownership plans. This helps align the interests of the company with that of the workers.
