Page 150 - Initial Public Offering - An Introduction to IPO on Wall Street

declares bankruptcy and they are sometimes not paid at all in such cases, which raises the
investment risk.

In collecting dividends and claiming income or assets, preferred stock takes precedence.
Preferred shareholders generally have no voting rights. Where common stock dividends may
differ, dividend payments made to preferred shareholders are constant. The preferred
shareholders are paid after bondholders if the business defaults; common shareholders are the
last ones to be paid. Interest rates will decide, not unlike bonds, the valuation of the preferred
stock.

Higher interest may trigger a loss of value for preferred stock. If there is a decline in interest
rates, by buying them from shareholders, the business will "call" the stocks. This is generally
done by limiting the number of dividend payments to lower costs. Five years after it is issued,
preferred stock is usually callable.

Value, income, and growth are the three main considerations for investors when selecting a
stock. A new business that demonstrates potential is generally the one that issues growth stock
to retain the stock until the value increases, an investor might invest early in a growth stock.
Dividend payments are the main reasons for buying/investing in income stocks. Finally, value
is the main consideration when evaluating a stock that is selling at a lower price than what it
should sell at according to conventional metrics.

There are advantages and disadvantages for investors associated with each type of stock, and
based on the business's rating, there may be a lot of risks involved. Based on investment ratings,
stocks are graded by agencies such as Moody's, Fitch, and Standard & Poor's. A high score
from one of these organizations indicates a less risky investment. So, organizations issuing
stock should look to get into the good books of Moody's, Fitch, and Standard & Poor's.

8.1.3 Issuing Stocks as an Exit Strategy
For certain businesses, issuing stock provides an exit strategy for investors who, when the
business was private, provided capital. An exit strategy is a way of separating shareholders,
traders, company owners, or venture capitalists from an investment, either to gain profit or to
reduce losses.

As the shift from private to public results in profitability, an IPO of an organization can be used
as a catalyst for an exit. In such situations, the stock is released to realize investment profits.

During the dot.com boom, exiting after an IPO became a frequent thing, which culminated in
the issuance of a lot of stock that had no real value. This pattern created a bubble that burst,
leading to many high-profile bankruptcies. To avoid a similar scenario in the future, most
investors today examine an IPO extremely carefully before buying stock. So, organizations
need to keep this in mind before issuing stock.

8.2 Investment Banker
Without investment banks' intervention, companies cannot enter the public stock markets.
Businesses can assess the most efficient timing, valuation, and overall size of a new stock issue
by partnering with bankers.

Investment bankers are active from the outset of the regulatory process to the issuance of new
stock and beyond. They lend businesses they introduce to the public markets their expertise,
connections, and financial capital. There is a variety of assistance provided by investment

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