What is an IPO? | CNBC Explains

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0:00As the saying goes, ideas are a dime a dozen. Acting on an idea though, can make all the difference.

0:07Say you turn your vision into a startup. It starts small. Then it gets even bigger.

0:12Then it gets even bigger.

0:15Until one day, you may get to decide it’s time for your company to go public.

0:23IPO stands for initial public offering.

0:26It’s the very first sale of a stock issued by a company on the public market,

0:30which essentially means you’re turning your private company into a public one.

0:35So, when it’s private, a company is normally owned by a small number of investors.

0:39That usually consists of people like you, your friends or parents,

0:42plus professional investors like a venture capital firm.

0:46Once the company goes public, you’re opening up that business to be owned by a large number of people.

0:51In effect, the firm goes from being owned by just a few people to potentially tens of thousands of shareholders.

0:56To commemorate the event, most stock exchanges hold a ceremony of sorts.

1:00At the New York and London stock exchanges, you’ll ring the bell.

1:03At the Stock Exchange of Hong Kong, you’ll strike the gong.

1:08So why go public? Well, going public raises a lot of cash for a company.

1:12With that money, it becomes easier to scale and grow, invest in infrastructure and attract top candidates.

1:18Plus, there’s the bragging rights you get from being listed on a stock exchange.

1:22It’s important to note that large companies can also stay private too.

1:26IKEA, Mars, Aldi and State Farm are just some examples of massive companies, that are private.

1:32After all, going public isn’t a simple process, normally taking about four months to complete.

1:37The company will start with finding what’s known as an underwriting firm,

1:40typically an investment bank or several.

1:43If and when the firm takes on the job, they put up the money to fund the IPO,

1:46essentially ‘buying’ the shares before they’re actually listed anywhere.

1:51The firm works with the company to determine what type of security to issue, an offering price,

1:55the number of shares and the optimum time to bring a company to the public market.

2:00In the U.S., they also handle registering with the U.S. Securities and Exchange Commission,

2:04which makes sure all of the financial information has been disclosed and is accurate.

2:09Then you’re finally good to go.

2:11The underwriter’s goal is to sell shares to the public for more than it paid the company.

2:15After all, that’s how they make their money.

2:17But going public can also mean a nice payday for the business’ founders and early investors.

2:23You often hear about people becoming millionaires, or even billionaires, after their company goes public.

2:28Here’s why. If you’ve worked at a private company that’s intending to go public one day,

2:32sometimes part of your compensation is given through equity, part-ownership of the firm.

2:37It’s a way to hire talented people without a lot of cash upfront.

2:40And if the company does go public, you get a piece of it at its new valuation. Here’s an example.

2:46When Snapchat went public in 2017, its founder Evan Speigel scored big.

2:50Speigel got a stock grant of $636 million when the company went public.

2:55The following year, he sold more than 2.6 million shares. The sale of his stock was equivalent to $50 million.

3:03The number of companies going public is constantly fluctuating.

3:06Globally, 1,764 companies floated in 2017, a nearly 50% increase since 2016 and the most IPOs since 2007.

3:16189 of 2017’s IPOs were in the U.S., a 70% increase from the year before.

3:22A few of the biggest IPOs in history include Facebook, Visa, and General Motors.

3:27And in 2014, Alibaba smashed the record, with its debut on the New York Stock Exchange bringing in $25 billion.

3:35All that said, going public has its drawbacks.

3:38Publicly traded companies are subject to oversight by regulators

3:41like the U.S. Securities and Exchange Commission.

3:43And once you list your company on an exchange, you’re not just reporting to yourself anymore,

3:47you answer to all your shareholders.

3:49If you don’t make them happy, you can be sidelined, or even fired, from the company you founded.

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What is an IPO? | CNBC Explains

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