Facebook Going Public – Learning Objective:
- To learn what an IPO is and why a company goes ‘public’
There seemed a time in the business news not too long ago where all you would hear about was the debut of Facebook in the stock market. Now that Facebook has officially started trading and media outlets have squeezed as much as they can out of its initial stumble, it appears that the world has predictably moved on. For those beginner investors who were drawn in to the hype of Facebook going public, trying to put the events of Facebook’s debut as a publicly traded company into some kind of context is difficult, especially if the headlines on it have started to disappear. In this second part of our series, we take a closer look at what an IPO means and why they happen. If you missed the first part of the series, you can click here to read it.
Will that be cash or credit?
To understand how stock markets function, one of the most important questions to ask is how companies end up there. After all, isn’t shopping much easier when you realize why you’re in the mall in the first place?
From startups to blue chips, the one rule of business is true – it takes money to make money, and if you’ve got big dreams as a business you’ve certainly got to be able pay for what will help get you there. Even though some of the regulations have changed, the principle of raising money to grow is as true today as it has ever been – check out this neat little cartoon from the 1950’s for a fun explanation.
The decision that all businesses have to make is how they are going to pay for what they need in order to do what they do. Of course since money doesn’t just appear out of thin air (unless you’re a central banker – which is another story altogether) it needs to come from somewhere or someone. The two main ways of raising money (that it doesn’t already have) for a business are to take out a loan (debt) or sell a portion (equity) of your company.
An IPO or initial public offering, similar to the one that Facebook undertook, is an opportunity to raise money to help pay for all of those things that are going to make a company even more money in the future (or at least that’s how the story is supposed to go). If you are a business owner, you want to raise as much money as possible for your business and “going public” enables businesses to sell shares of their company to the general public, as opposed to selling to only a limited number of investors. Business owners raise money from investors – people who want their investment capital to appreciate in value.