Seventy percent of the human body is composed of water. Thus, every human being needs water for life support. There are many incidents wherein individuals survived for several weeks by just drinking water.
Trees and plants need sunlight to complete their photosynthesis or their food-making process. In addition, it is also an essential element for their growth. Without sunlight, their chance of survival is very slim even when they are supported with water and necessary soil nutrients.
In the same manner, companies need capital or financial assets to support their day-to-day business operation. They need to pay the suppliers of the raw materials that they are using to manufacture their products. They need to pay their employees who helps the company manages its operation. Advertising and other PR stuffs also needs financial support in order to promote their products to the public.
Thus, capital for all companies serves as their “bloodlines”. Without it, no business operation, and definitely, no generated revenue for the company.
Companies can raise additional capitals that they need to support their business operation as well as possible expansions in various ways. However, one of the more popular ways to raise capital for a company is the IPO or the initial public offering. It is referred to as the first sale of a company’s common shares to interested public investors. As previously mentioned, it is primarily used to raise additional capital for the company. Keep in mind that this term only refers to the first public issuance of a company’s common stocks. Any later issuance of common shares to interested public investors is now referred to as a secondary market offering.
Initial public offering of common stocks has proven to be an effective way of raising additional capital for a company, though there are legal compliances and reporting requirements that must be met. The United States is considered to be imposing heavy legal requirements to those companies that will file an IPO for additional capital generation. Under the Federal Law, all IPO process are governed by the Securities Act of 1993 and laws of the U.S. Securities and Exchange Commission, with each stock exchange has its separate respective rules that every company must follow.
The IPO process generally includes one or more investment banks (financial entities that assist both public and private companies or corporations in raising capital as well as provide strategic advisory services for acquisitions, mergers, and other kinds of financial transactions) as the underwriters. The company will enter a contract with the underwriter to facilitate the issuance of the stocks to the public. The underwriters will be the one to approach investors who are interested in buying those common stocks.
During the early years of the IPO, it is considered to produce a positive mean initial return to the listing companies. In 1965 when the IPO process is still on its first years of operation, there are around 120 companies listed which generates an average initial return of 11.4 percent from the issuance date to the end of the offering month.
IPO analysts recorded an average of 22 percent worth of initial returns on the listed companies from 1965 to 2004. It clearly shows that many investors are interested on purchasing shares through the IPO process. It also illustrates that companies under IPO listing generally provides an additional capital for them.
The initial public offering of common stock during the 1965 era is just a manifestation that the IPO process, despite of the heavy legal requirements that must be made, it is still the most ideal way to issue stocks to the public and raise additional capital for a company’s day-to-day business operation.