As the saying goes, money makes the world go round. Nowhere is this truer than in business. Money isn’t just symbols on a page; it’s power, authenticity and reflects how consumers view your brand and whether they trust you.
An initial public offering is when an independent company first sells its stock to the public. It allows the company to accumulate capital for expansion or other purposes by selling ownership shares. By making their stock available on an exchange, buyers are more likely to buy shares without worrying about being scams or non-legitimate. The benefits of expanding internationally usually outweigh these concerns for big businesses. There are two types of IPOs: “primary” and “secondary.” A primary IPO is when a public company offers its shares for the first time. Secondary IPOs occur when private businesses sell stock that private shareholders once owned. It’s usually done to raise money, too.
Initial Public Offering
In an initial public offering, an independent company sells its stock first. They raise the money needed to expand or grow their business by advertising upcoming IPOs hoping that investors will buy them when they go public. IPOs come with many risks because private companies cannot offer as much information to investors as publicly traded companies. Also, IPOs can either raise large amounts of money or fail and not increase their business at all. While Facebook’s 2012 IPO was successful, Etrade had a rough 2013 after going public that year.
Secondary Public Offering
Like in Primary IPOs, secondary ones also occur when a company wants to raise money from its newest stockholders. The difference is this: these shares are initially held by other private shareholders. It is usually not an option when a company raises money for the first time. Facebook’s 2012 IPO was also considered secondary because they were using shares already in public hands to sell to new investors.
Follow-on Public Offering
A follow-on offering occurs after a company has already listed its stock on an exchange. They have already raised money from their initial or another offer. Stockholders can decide to continue selling their shares if they want more cash. A big reason companies do this is to diversify who owns the business. Sometimes, it makes more sense for stockholders to cut ties with the company and get paid instead of being involved in management.
American Depositary Receipt (ADR)
Another way for Asian companies to raise money is by selling “American Depository Receipts” on U.S. exchanges. It involves listing foreign security on an American exchange representing ownership in that company. Investors who buy ADRs buy shares in the overseas company, but it’s called something different because they are held by a financial institution overseas. Let’s go back to Facebook again. Its 2012 IPO was considered an ADR offering because it sold its stock under the ticker symbol on FB to investors based in America.
Global Depository Receipt (GDR)
Global depository receipts occur when a company decides to list its stock on exchanges worldwide. They are similar to ADRs, except they are not limited to being listed only in the United States. As of 2015, over 300 GDR programs were available for investors who want exposure to companies from Asia. Many Asian businesses do this because it helps their companies gain clout and international exposure.
Stock Splits/Special Dividends
As companies grow, they have the chance to reward shareholders by giving them extra shares for free or splitting their stock into smaller fractions. It’s done so that investors who own fewer shares will not feel as if they are being diluted. Some companies do this to increase the liquidity of their stock without having to spend money on an IPO. Sometimes called “special dividends”, these cash gifts benefit stockholders. However, it does not affect earnings per share (EPS) and can be confusing because it’s tough to determine how big the company is afterward.