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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?

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May 2017

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:

  1. Take out a business loan
  2. 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.


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