How do companies initially sell stock?
How do companies sell stocks to shareholders through the primary market? Another way of wording my question is, how do people buy stocks directly from the company and not from the stock market?
In order to buy a publicly traded stock you must buy the stock listed on one of the stock exchanges such as the NYSE, AMEX, or NASDAQ. Either when it first goes public (IPO) or thereafter in the secondary market.
When a private company goes public it is referred to as an Initial Public Offering, or IPO, by selling shares of stock to the public usually to raise additional capital. After its IPO, the company will be subject to public reporting requirements and its shares often become listed on a stock exchange. Then the shares trade openly in the secondary market.
There is one simple reason why most private business owners decide to sell ownership in their company in order to trade on the stock market: to raise money. Going public is often the best way for an already successful business to raise capital.
There are two major options for businesses to raise money:
- Take out a business loan
- Sell ownership in the company
When a company goes public they are selling ownership in their company.
They may want to expand their business, hire new talented individuals, open more locations or any number of reasons that require obtaining more capital at the risk of giving up ownership in their business.
One process of taking a company public involves hiring a large investment bank, who acts as underwriter for an initial public offering. The underwriter decides how much money investors are willing to offer for shares in the company. An initial public offering (IPO) is then planned out and the company shares hit the stock market at a predetermined price.
While ultimately the initial capital raised for the company through the IPO will come from individual investors who purchase shares, the underwriter will usually finance the transaction, providing capital to the issuing company in advance of the stock going public.
Companies sell stock through investment banks, called underwriters (or syndicate for a group of investment banks) to the public in IPO's. The IPO market is called the primary market. After a period of time, public equities then trade in the secondary market, which is where most equities trade. A few investment banks run auctions when a company decides to go public. After a period of time, companies can have secondary offerings, which are usually when stock is offered by specific large individual holders of the companies stock. It is considered a follow up offering. Underwriters typically subscribe to buy stock and also sell it during the process, and often retain rights to buy more of the stock as part of the IPO process as well. I hope this answers your question.
Yale Bock, CFA
Y H & C Investments
Let me answer this question by starting with the assumption that you are referring to publicly-traded companies. Private companies sell shares directly to investors, obviously, but those investors are not members of the general public.
A publicly traded company will sell shares to the public through an underwriter, usually an investment banking firm. The underwriting firm places shares with its customers (institutional and individual investors) according to the buy orders that it has received prior to the offering date. If an issue is oversubscribed, it allocates shares at its discretion. An underwriting is subject to SEC regulations and is fully described in the prospectus, or offering document. All shares of a particular underwriting are sold at the same time and price. Unless a company does an underwritten offering, it does not sell shares to the public and if you buy shares, they will always be bought from another shareholder.
Although companies initially sell stock to shareholders through underwriting groups of broker/dealers, there are several situations in which you buy shares directly from the company. The more common one is when you receive a cash dividend from shares already held. In that case, you may have the option to reinvest the dividend and buy additional shares directly from the company. The less common case is a private offering of shares, which is typically done by newer companies that are seeking initial infusions of cash. These private placements may be to financial institutions or to individuals who qualify with specified levels of income and net worth.
I think you're asking two different things.
Companies INTIALLY sell stock via an IPO (intitial public offering). For that you usually have to be "in" with one of the underwriting banks/brokerages.
Once a stock is public, you often can buy directly from the company. As opposed to a online broker or in your IRA account.
Go to that company's website and look for a link for "Investors". That should give you instructions for how to purchase stock directly.
For example, if you go to the IBM website under Investor Relations > Stockholder Services, you'll see that you can purchase directly through the IBM transfer agent, Computershare Trust Co.
Hope that helps!