Question

Describe the process of the primary market for stocks (Initial Public Offering (IPO)) and the secondary markets (stock exchanges). What types of companies are on an exchange (public corporations) and what are the positives and negatives of being a public corporation?

Answer 1

IPO: This is when a previously private company decides to issue shares to raise capital. Thus the company goes public.

The process for IPO:

1. Select an investment bank to provide underwriting services.

2.Underwriting process whereby the underwriter acts as a link between company and public. It generate letter of intent,underwriting agreement, Registration statement, etc.

3. After IPO is issued, the company and underwriter decides on the offer price.

4.After the issue has been brought to the market, the underwriter has to provide analyst recommendations, after-market stabilization and create a market for the stock issued.

5.The final stage of the IPO process, the transition to market competition, starts 25 days after the initial public offering, once the “quiet period” mandated by the SEC ends.

Secondary market:

This is where the stocks once issued by the companies are traded among investors. The companies do not have a gain on this, the investors benefit by a rise or fall in stock market. Stock market trading can take place through stock exchanges or OTC.

Types of public corporation:

1. LLP

2. Foreign companies

3. Real Estate Trusts,etc.

Advantages:

Economies of scale,,Easier planning and coordination,autonomous setup,protection of public interest,etc.

Disadvantages:

• Difficult to manage
• Risk of producing inefficient products
• Financial burden
• Political interference
• Misuse of power
• Consumer interests ignored
• Expensive to maintain and operate