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Saturday, April 8, 2017

Q: Why do companies come up with an IPO?

A: When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital

After the IPO, when shares trade freely in the open market, money passes between public investors. For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity to monetize their investment

Following are some of the other benefits of the IPO to the company:
  • Enlarging and diversifying equity base
  • Enabling cheaper access to capital
  • Increasing exposure, prestige, and public image
  • Attracting and retaining better management and employees through liquid equity participation
  • Facilitating acquisitions (potentially in return for shares of stock)
  • Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

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