A:

An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand. Although further expansion is a benefit to the company, there are both advantages and disadvantages that arise when a company goes public.

There are many advantages for a company going public. As said earlier, the financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.

Subsequently this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.

Even with the benefits of an IPO, public companies often face many new challenges as well. One of the most important changes is the need for added disclosure for investors. Public companies are regulated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC). More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. These costs have only increased with the advent of the Sarbanes-Oxley Act. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments and accounting oversight committees.

Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long-term growth. The actions of the company's management also become increasingly scrutinized as investors constantly look for rising profits. This may lead management to perform somewhat questionable practices in order to boost earnings.

Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during the underwriting process as the company works with an investment bank to weigh the pros and cons of a public offering and determine if it is in the best interest of the company.

To learn more, see IPO Basics Tutorial, The Murky Waters Of The IPO Market, and Don't Forget To Read The Prospectus!

RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. When did Facebook go public? (FB)

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  3. Do hedge funds invest in private companies?

    Hedge funds normally do not invest in private companies because of liquidity concerns. Capital funding for private companies ... Read Full Answer >>
  4. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
  5. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  6. Can mutual funds invest in private equity?

    Mutual funds can invest in private equity indirectly by buying shares of publicly listed private equity companies, such as ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  2. Investing Basics

    Inside IPO Roadshows

    Understand more about IPO road shows. Learn the reasons why an IPO road show is important for the success of a company's public offering.
  3. Stock Analysis

    If You Had Invested Right After Berkshire Hathaway's IPO (BRK.A)

    Learn how much you would now have if you had invested right after Berkshire Hathaway's IPO, and find out the classes of shares that you could invest in.
  4. Stock Analysis

    Is Now the Right Time to Buy Coty? (COTY)

    Find out whether fragrance and color cosmetics powerhouse Coty deserves a place in your portfolio. Will recent acquisitions help turn the company around?
  5. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  6. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  7. Stock Analysis

    Moderna Therapeutics: An IPO Candidate in 2016?

    Find out the reasons why 2016 may be the year when highly valued biotech company Moderna Therapeutic files for an initial public offering (IPO).
  8. Stock Analysis

    Domo Inc: An IPO Candidate in 2016?

    Learn about key information on Utah-based technology startup Domo Inc. and how the Domo dashboard differentiates itself in the world of business intelligence.
  9. Stock Analysis

    GoDaddy Inc: How It's Fared Since the 2015 IPO (GDDY)

    Evaluate GoDaddy's stock performance since its April 2015 IPO, and determine how you would have fared had you invested in the company on day six.
  10. Stock Analysis

    If You Had Invested Right After Comcast's IPO (CMCSA)

    Evaluate how Comcast's stock has performed since the company's 1972 IPO, and learn how you might be a millionaire today had you invested a small sum in the IPO.
RELATED TERMS
  1. Investment Banking

    A specific division of banking related to the creation of capital ...
  2. Private Equity

    Private Equity is equity capital that is not quoted on a public ...
  3. Road Show

    A presentation by an issuer of securities to potential buyers. ...
  4. Investment Banker

    Someone working at an institution raising capital for companies, ...
  5. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  6. Path To Profitability (P2P)

    A clearly defined route to profitability as described in a business ...
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center