Why does a company go public?
A public company will be more closely watched by securities regulators. It also has to meet tougher reporting rules. So why would a company go public? Reasons include:
- Raise capital - A public company sells shares to raise money to improve its business.
- Get financing - Public companies may be able to borrow more easily and on better terms.
- Attract good people - Public companies are more likely to offer stock purchase plans or stock options to keep their top employees or attract new ones.
- Create a stronger brand - A public company often gets more media attention so people get to know its brand better.
What should I ask before I buy an IPO?
- What will I make? Most of the time, IPOs are more risky than a stock that's been on the stock market for a while. It's very hard to predict how the price of an IPO will change once it goes on sale. Before you decide, read the prospectus from the company issuing the IPO. The prospectus describes the business plan and notes important risk factors. Check whether the company is making money or when it expects to become profitable.
- What fees will I pay? In most cases, you won't pay any commission to buy an IPO. That's because the company issuing the IPO hires underwriters to price and market the new stock. Underwriters get large fees for their services. Their earnings and fees are built into the price of the stock. You can't avoid these built-in fees. However, you can make sure the costs are in line with what you hope to make.
Remember: Find out as much as you can before you buy an IPO
Make sure you know how much growth you can reasonably expect from the stock and how long you want to hold it.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.