An Initial Public Offering—also called going public—is the process whereby a company begins offering its stock to the public.
The sale of stocks is a form of equity financing, whereby a company generates capital based on the value of the company. A company could start out selling its shares of preferred stock only to employees of the company, or perhaps close affiliates or customers, but then at some point in the future may start selling its common stock to other investors. When this is done it is said to be the Initial Public Offering. This is usually done by fairly new companies, often after obtaining venture capital and having shown reasonable sales and profit for a period of time.
The sale of stocks brings a company additional income that it can then reinvest into its structure. It could be used to buy new equipment, land, or other property, hire new employees, purchase goods or services, or be used for any of a number of other operating costs.
Stocks represent ownership in a company. As such, when an Initial Public Offering is made, the shareholders are able to cast their voices, often through the use of voting, in deciding the direction a company should go.
An Initial Public Offering, while an enticing way to bring in a large amount of revenue quickly, and perhaps more over time, can be a two-edged sword. Investors will hope to quickly be able to get good return on their investment, and that influence can be a great driving force on a company. Bad decisions throughout the management hierarchy can also have a profound impact on how the public views the company, as well as the price of the stocks. In preparation to make an Initial Public Offering, most businesses should look for help from an underwriter.
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