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IPOs: Initial Public Offerings

Private companies can go public through a stock market listing, also known as an initial public offering (IPO). In these cases the first offering of stock is rarely the last, and further shares will be created through rights issues and share placings. The typical path of a successful company starting from scratch would be it gets going on the savings, bank borrowings or mortgage taken out by the founders. Once the company is incorporated, shares are created with the entrepreneurs
owning the whole share capital.

Needing more money to expand they then turn to venture capitalists who will buy new shares in the business, in return for which the latter own a portion of the company and sit on its board. This initial injection of outside money is a first stage investment. If the company is one of the minority to survive it will then get further slugs of venture capital funds, and if it evolves further will probably move on to an IPO, moving in to the publicly traded arena. The IPO will typically be partly a primary offering of new shares to raise money for the company, and partly a secondary one, with the founders and venture capitalists selling some of their existing shares to lock in welcome profits. Stock market volatility all but choked off the flow of IPOs in 2009 as firms proved unwilling to risk getting a bad price for their shares or no price at all.

An IPO is a way for a company to build capital to invest in the business. Basically the company issues shares and sells them to investors for a partial stake in the business. The value of a stock depends on the value of the enterprise; if more investors seek shares in the company, then the company’s stock price will rise.

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