Selling New Stock

Introduction to Stocks

The first time a company issues stock, it's called going public - making it possible for outside investors to buy the company's stock. To go public, the management registers the stock with the Securities and Exchange Commission (SEC) and makes an initial public offering (IPO).

Venture Capital - An entrepreneur comes up with an idea for a product or service and borrows enough money to launch a start-up business. If the company grows, the entrepreneur can get funds for expansion in the private equity market. There, wealthy investers, investment companies and banks pool their money, called venture capital, that they are willing to risk on a new business in exchange for a role in how the company is run and a share of the profits.

Going Public - If a small company finds its product or service in great demand, it quickly outstrips the ability of venture capitalists to provide money for rapid growth. That's when it decides to go public.

First the management goes to investment bankers who agree to underwrite the stock offering - that means they buy all the public shares at a set price and resell them to the general public, hopefully at a profit.

The underwriters help the company prepare a prospectus, a detailed analysis of the company's financial history, its products or services, and management's background and experience. The propectus also assesses the various risks the company faces.

Attracting Investers - The proposed stock sale is advertised in the financial press. The ads are commonly known as tombstones because of their black border and heavy print. The day before the actual sale, underwriters price the issue, or establish the price they will pay for each share.

When the stock trades the next day, the price can rise or fall, depending on whether investors agree or disagree with the underwriters' valuation of the new company.

Selling Direct - Some companies are taking a shortcut to an IPO by making a direct offering to investors, or by selling shares on the Internet through an eclectronic brokerage firm. This type of do-it-yourself offering saves money by eliminating fees paid to underwriters. But the companies still must meet the SEC's filing rules.

One drawback of direct offerings that are not listed on an exchange or followed by market analysts is that trading is often thin, or infrequent. That may limit investor interest in the stock.

Secondary Offerings - If a company has already issued shares, but wants to raise additional capital through the sale of more stock, the process is called secondary offering. Companies are often reluctant to issue more stock. The reason is that the larger the supply of stock outstanding, the less valuable each share previously issued.

For this reason, a company typically issues new shares only if its stock price is high. To raise money otherwise, it may decide to issue bonds.