Shares

How shares are made public for the first time?

Shares are made public through an initial public offering using a book building process.

Initial Public Offering (IPO)

Initial public offering (IPO) is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to increase, but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO, the issuer gets the assistance of an underwriting firm, which helps in determining what type of security is to be issued (common or preferred), the most suitable offering price and the proper time to bring it into the market.

IPOs are a risky investment as it is tough to predict what the share will do on the trading day as well as in near future because, there is no substantial historical data to analyze the company’s standing. In addition to that the companies up for an IPO undergo a transitory growth period which is subjected to uncertainty for future values.

Book Building Process

In order to raise money, a company plans on offering its stock to the public and this process is called Book building process. This process is used either by an IPO (Initial public offering) or FPO (follow-on public offers) for effective price discovery. It is a mechanism where, during the tenure for which the IPO is open, bids are collected and compiled from investors at various prices, which are higher or equal to the floor price (lowest price at which bids can be made). The offer price is decided after the bid closing date. As soon as the cost of the stock is determined, the issuing company can then decide upon the division of its stock to its bidders.