Page 159 - Initial Public Offering - An Introduction to IPO on Wall Street

Since these disclosures are so extensive and regular, when deciding to go public, there is a
considerable expense involved that should not be ignored. Although there is a significant
expense associated with SEC compliance, the cost of stock issuance would be much greater
without it.

A significant amount of information is accessible to prospective investors due to SEC
regulations. Besides, a strong incentive is available to many otherwise dishonest organizations
to avoid misrepresentation of business’s financial records. This makes trading more secure for
everyone and encourages investors to trade, with less bias, at higher rates.

The process of issuing shares is less complex for smaller companies. Truncated forms and
processes allow companies requiring lower sums of capital to sell shares publicly without using
an underwriter. In comparison to businesses going public with an IPO, these regulations
involve slightly reduced reporting requirements. The ultimate result is public issuance, which
costs much less than the conventional public-going process.

8.5 Securities Market
An IPO makes a business’s stock available on a securities exchange or market for sale to the
general public for the very first time. A securities market is where demand and supply-based
trading of securities, such as bonds and stocks, takes place. Pricing is determined by securities
markets, and participants can be both professional and non-professional.

Businesses use IPOs to raise money for growth, monetize early private investors' investments,
and become publicly traded entities. It is not necessary for a business that sells shares to return
the capital to its public investors. After the IPO, money moves between public investors as
shares are traded openly in the open market.

When a business lists its stock on a securities exchange, the money paid by the public investors
for the recently issued shares goes directly to the organization (primary offering) as well as to
any initial private investors who want to sell all or a fraction of their shares (secondary offer)
as part of the larger IPO. As such, an IPO enables a business to tap into a large pool of potential
investors to generate funds for future growth, debt reduction, or working capital.

However, to ensure the above, you need to understand the different levels of security markets.
There are two levels of securities markets. The first is primary markets where the issuance of
securities or stock happens and the other level is secondary markets where the selling and
buying of existing securities happen.

Shares are issued through a primary market, a market dealing with new financial assets, when
you go through your IPO. As mentioned earlier, the sale is arranged by an investment bank,
which matches you, a business with stock to sell, with buyers who wanted to purchase it.

8.5.1 Organized Exchanges
Investors start to buy and sell your stock on a secondary market after a certain time has elapsed.
The profits from sales in this market go not to your business, but to the investor who sells the
stock. The most famous of all organized exchanges are the New York Stock Exchange (NYSE).
Other organized exchanges include AMEX and regional exchanges that trade the stock of
smaller businesses.

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