Stocks begin trading publicly in an initial public offering. The IPO requires a great deal of preparation and investment on the part of the listing company and can take months or even years to complete. Once stocks are issued publicly for the first time, company executives and investors can return to the public markets for subsequent sales. In order for a stock issuance to be considered a success, there must be investor demand, which is illustrated in a rising stock price.
Prior to listing shares in the public markets in an IPO, a company must file a registration statement with regulators. In the U.S., this regulator is the Securities and Exchange Commission and the document associated with a primary offering is known as an S-1 filing. A company uses an S-1 to inform potential investors about the business and its competitive position. All the details, such as the size of the offering and price per share, do not need to become public at once. As the launch date nears, however, deal participants must begin disclosing this financial information in a prospectus, which is a document contained within the S-1 filing.
Once company officials decide to issue stocks in a public offering, they must hire underwriters, which are the investment banks that will perform the transaction. Investment bankers help companies publicize the offering prior to the launch date and also set the conditions for the stock sale, such as price and timing for the sale. As part of the underwriting process, investment bank underwriters purchase the stocks prior to the IPO and then attempt to sell those shares for more money to the public on the offering date.
When a company decides to sell shares in the public markets for the first time, it must decide where to list its shares. For companies seeking the most amount of transparency, publicity and opportunity, shares are listed on a major stock exchange, such as the New York Stock Exchange or NASDAQ. These companies must meet the standards set by the exchange to maintain their listings. Companies seeking less stringent listing requirements may list shares in the over-the-counter bulletin board markets, which are less regulated than major exchanges, according to the Financial Industry Regulatory Authority.
In addition to an IPO, large investors can issue stocks publicly in other deals, such as a follow-on offering or a secondary sale. In a follow-on offering, companies issue additional shares of stock after a stock has already begun trading in the public markets. This is a means to raise more capital and it adds to the shares outstanding, or total number of shares available for trading, which dilutes existing investors' equity ownership. In a secondary offering, a large investor or group of investors that may include original IPO shareholders or company executives sell a set number of shares to the public, which does not increase the shares outstanding.
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