Businesses can't enter the public stock markets without the involvement of investment banks. By collaborating with bankers, corporations can determine the most effective timing, value and overall size of a new stock issue. Investment bankers are involved from the beginning of the regulatory process to the day new shares are issued -- and beyond. They lend their experience, contacts and financial resources to companies they are bringing to the public markets.
Once a corporation hires an investment bank, that firm becomes the underwriter for the company's initial public offering, or IPO. Underwriting involves placing an overall value on a business organization as well as acquiring shares at a discount to later be distributed in the public markets. Depending on the size of an IPO, it is not uncommon for multiple investment banks to underwrite the new issue, with one firm serving as the lead underwriter.
Bankers help organizations go public by learning of the demand for shares in a road show. They do this by physically visiting potential investors in major cities to discuss the opportunity and attempt to generate interest in the IPO. While bankers typically take the lead during road shows, Internet company Facebook broke this trend during its 2012 IPO. Facebook executives created an unusually informal environment when marketing the upcoming IPO throughout the road show, which set a new trend among technology companies, according to a 2012 "Inc." article.
On the day of the IPO, investment bankers begin selling shares to public investors in an attempt to earn a profit and increase the market value of the corporation. Bankers also enforce lock-up periods for new stocks that generally last about six months; during these periods, early IPO investors cannot sell their holdings. This is done to generate demand for the stock. In the four-year period leading up to 2012, however, investment bankers were increasingly lifting lock-up restrictions amid strong overall market demand, according to a 2012 article in "The Wall Street Journal."
Pricing is one of the most delicate tasks when launching an IPO. If the new stock is priced too high, investors will most likely shun the opportunity. On the other hand, a new stock that is priced below its potential can cause participants to miss out on profits. Investment bankers help corporate executives set a fair price for a new issue, but their advice isn't always correct. When investment bankers make mistakes in pricing new shares, according to a 2011 Market Watch article, it usually isn't apparent until after the new issue begins trading.
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