Companies Going Public
We have discussed stocks, and how stock exchanges were begun. Recent news’ stories have noted that new stock offerings, known as Initial Public Offerings, (IPO’s), are starting to rebound this year, for the first time since the recession begin. The experts say this is a good sign that the stock market may finally be in a recovery mode. As private companies, have to see a big payoff- to go to the trouble.
Now let’s see how a company goes public, and gets listed on the stock exchange.
The Purple Haze Condom Company, we introduced recently, is back in the news.
We discussed the company selling bonds to generate capital to build a new factory.
Let’s remember, the company CEO is John Dick- is also the company founder and largest stockholder. He is third generation in the condom business, with Grandpa Dick founding the company, just as World War II ended-making a killing.
John Dick III, MBA, has inherited the company and is ready for the spotlight. He has completed the new condom factory, paid with their recent bond offering. His new condoms are selling like hotcakes.
His scientists invented a new condom that release medication that improves enjoyment for women. Ladies all over the world are insisting on the use of this new condom, even after menopause. Kosmo was calling it the Viagra condom, while even the Puffington Post was writing a piece about the-”Remarkable Rubber Rebound!”.
Meanwhile, back at Mr Dicks current secret location:
So Mr Dick, while flying back from Costa Rica, with his “Assistant” says, “Ms Washington, can you get this knot out of my shoulders-I am sooo stiff, uhh, from golf, and I am a little old for acrobatics….” “And did I tell you how many of our new medicated condoms we are selling- the profits are exploding-I think we need to go public!”
“But Mr Dick, I thought this was our little secret?”
“Not that, honey-buns, I mean we need to sell shares of The Purple Haze Condom Company stock to the public. I bet we can raise another $500 million-I will be able to trade this G-5 jet in for one of those airliners like Sergey B, and Mark C.”
So when the CEO arrives back at the office, he starts the proceedings to initiate an IPO-or initial public offering. An IPO is the selling of stock of a private company to the public. He gets investment bankers to study the books and decide how many shares might sell, and at what price. The investment bankers that help with that process get first dibs on the stock, along with their wealthy clients and hedge fund buddies.
With the recent publicity of the Ladies Viagra Condom, the IPO (initial public offering) is over-subscribed.
“What does over-prescribed mean, Mr Dick?” said his assistant. “I thought prescribing was something your doctor did when the condoms broke!”
“Hush your mouth, Ms Washington! You know our condoms don’t break! (much…) Over-subscribed, not prescribed! It means we have more buyers that want the stock, than we have shares! We can increase our offering price, and I can be even richer!” Everyone seems to want to own stock in the company that makes the Ladies Viagra Condom!
He currently owns 90 % of the company, and since he wants to keep control, he only sells the 40% to the public. He will be worth at least $100,000,000 plus by the end of the day.
(I wonder if someone will remind him to save a little of his new money, just in case he runs over a fireplug, and get’s hit with his own golf club.)
So let’s review some terminology involved in a company issuing stock to the public:
- Shares outstanding: how many shares of The Purple Haze Condom Company are available to the public. Many times the company is still partially owned by founders-and those shares are not for sale.
- Market capitalization: Usually known as “market cap”. The number of shares multiplied by the stock price on any given day-the market cap of the Purple Haze is 1 billion- 10 million shares going for 100 bucks a share. That puts it at the low-end of a mid-cap or medium sized public company. (For a recent example of market cap-BP lost over 70 billion in market cap over the first 8 weeks of the oil spill.
- Stock Exchange-when a company issues stock, they can choose which exchange to be listed-as long as they meet certain guidelines such as stock price and market cap. That is where the stock is bought or sold. The major stock exchanges in the US are the New York Stock Exchange (NYSE), and the NASDAQ exchange.
Since Mr Dick wants to be the Steve Job’s of the condom kingdom, he lists his company on NASDAQ, like Apple. The new stock symbol is SEX. As we leave Mr Dick’s office, he is on the phone arguing with the Time Square Billboard Company, about whether he can put a photo of his condom on his ad, or just a picture of the package!
Reader Questions:
Have you ever bought an IPO stock?
Have you purchased any single company stocks, and how did you do-did you make or lose money?
What terminology in the stock market keeps you confused?
Tags: company going public, how does a company go public, IPO, understanding IPO's
Millionaire Nurse Blog
What a great way to teach the ins and outs of the market! It might be a little advanced but options (beyond covered calls) confuse the hell out of me!
Thanks Evan, that is the idea, to have fun and learn at the same time.
I was once part of an MLM company that was the first and only so far to have an IPO. I wasn’t part of the IPO but bought stock shortly after. The stock tanked a year later but is still in the market..and I still hold those..I put in way too much money and it’s so low, I hope to recover just a fraction before I sell.
I have purchased other individual stocks on my own, doing my own research and they are almost all doing really well right now. The only other that is in negative is a penny stock I should never have bought..impulse buy
It’s a local copper mining company to where I live and sounded good at the time.
Great post by the way, it really helps to have a story to follow when learning some of these complicated (and sometimes boring) terms.
One thing I have learned is to take my losses and move on, unless there is a very compelling story.
[...] bunch of posts about investing. First up, Dr Dean over at The Millionaire Nurse blog writes about a fictitious condom company in a role play like guide to investment terms and vehicles. It’s pretty entertaining and I [...]