Gloucester County Institute of Technology



Reading: The Vocabulary of StocksPicture yourself as the owner of a growing company. You operate in a rented office that is so crammed with people and desks and equipment that you have bruises on your thighs from trying to get around the desk corners each day. You know you have to expand—in fact, you need to hire two more people to handle shipping and tracking right now, but there’s no place to put them. You also don’t have the money to rent—or buy—a larger space and to purchase more manufacturing equipment and hire staff. Where can you get money to grow?You’ve asked family members and friends to invest in the company. Some of them shrink away from you as if you have an infectious disease. Others offer you $1,000 or $5,000. That won’t put a dent in the $500,000 you know you’ll need in the coming year. The bank wants to see stronger profits before they’ll consider a loan. What’s left?Last year you made the decision to make the company a corporation. Doesn’t this give you the power to sell stock? Yes, you can sell small shares of your company to total strangers and maybe raise the money to make your company the success it is in your vision of its future.Now you have to decide which kind of stock you’re going to offer: common stock or preferred stock? This calls for a chart of the pros and cons of each.If you sell common stock, your shareholders (or stockholders) get to vote for the corporation’s board of directors. There’s a very remote risk that if you sell enough stock, someday the shareholders could own enough voting stock to control the board and work against you. On the other hand, although they may expect dividends—a share of the company’s profits paid out to shareholders—you don’t have to guarantee that you’ll pay them a set amount every year. If you sell preferred stock, you are stuck paying shareholders a guaranteed dividend as long as you are making a profit. However, they wouldn’t have any vote when it comes to choosing your board of directors.What are your choices? Continue operating on a shoestring, crammed in two rooms and a warehouse half the size you need, unable to expand—or taking the risk of letting the public buy shares through an initial public offering (IPO)?This is called going public, and it applies in more ways than one. Brokers and potential investors will start scrutinizing your operation and balance sheet; you’ll have to register your stock with the Securities and Exchange Commission—the government entity responsible for making sure everything about your company is legal—and your business will be subject to new regulations, including regular audits.Your company will have to find an investment bank (really, a securities firm, which specializes in this kind of deal) to handle the sale of your IPO, a process called underwriting. The investment bankers will either buy the stock offering outright and then resell it for whatever they can get (a higher price, they hope) or they will sell it and take a commission. Because it is the first offering of your stock, it will be sold in the primary market. (If the first purchasers sell the stock later on, it will be sold in the secondary market.)Then you, the underwriters, lawyers, and accountants must put together a prospectus, a written document that potential investors will read. It contains a detailed analysis of the company’s finances, its management team, and its products or services. The prospectus also spells out difficulties the company could face in the future, and the risks of investing in the company.Whew! That’s not all, though. You’ll still have to submit the prospectus to the Securities and Exchange Commission and stock market regulators. One to four months later, you’ll print the prospectus, the underwriters will recommend an opening stock price and number of shares to offer—and you go public. ................
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