Far too few people are aware of the basic mechanisms of the capital markets, or what it means when a company conducts what is known as a “public offering.” The idea behind capitalism is fairly simple, and despite what might seem to be a large and relatively arcane system, the basics of the capital markets are still shares of stock in various profit-oriented enterprises.
The colloquial phrase “going public” is shorthand for a company conducting what is known in securities law as a “public offering.” It is the process by which equity in the company and all its assets are offered to the general public in the form of stock shares. These shares are offered at a “public offering price,” usually by an underwriter. Once purchased, these shares represent an equity interest in a company, and can be freely traded to other investors at prices set by the equity markets.
The reason public offerings are important is because they create wealth in the form of company equity. Let’s say a company offers 25% ownership of itself in an initial public offering of one share of stock. If that share is sold to an investor for say, one thousand dollars, it means the company has a value of four thousand dollars. Why is this? Because the price of a share of stock is $1000, and the company retains three shares, which is the equity they haven’t sold yet.
If the price of that single share were to increase to two thousand dollars, then the company would be worth six thousand dollars. This is one of the key reasons companies are so concerned with their stock price.
Public offerings are tightly regulated for obvious reasons. If securities are being offered to the public, it is important confidence in the value of those shares is maintained and it is also important a market continues to exist so those shares can be traded fairly and with minimal friction. The efficiency of a market is one of the things that help maintain the value of the securities it trades.
Once a company has satisfied requirements like audited financials, a prospectus, and registration with governing organizations and the appropriate exchanges, it can offer shares of stock to the public in exchange for the capital necessary to continue developing its business interests.
Capital markets are the primary engine of growth in most economies. They provide enterprises with capital and the general public with the opportunity to pursue wealth.