UPDATE 5/18/2012 : Facebook made its debut on the stock market today with its founder Mark Zuckerberg ringing the opening bell from his headquarters in California. Facebook stocks were priced at $38/share, setting the company's market value at $81 billion! The shares rose briefly to $42 before dropping back to $38. Facebok is the third highest valued company to IPO in history. Lets revisit our article on what IPO means..
Facebook, the social networking giant, announced earlier this year that it will raise U.S $5 billion (that’s right $5 “Billion”), making it the largest internet company IPO ever. For a company launched in Feb 2004 in a dorm in Harvard, that is quite remarkable! It all began when Mark Zuckerberg, a Harvard sophomore, wrote software to connect students on campuses. Facebook has now grown to be an international phenomenon with over 800 million active users.
So what is there “to like” about an IPO? Why is facebook doing it? Lets find out.
It's all about shares
We saw here that stock or shares represent a person's ownership of a corporation. Lets's suppose you and your friend decide to start a lemonade stand. Your will need to buy assets like jugs and spoons, supplies like sugar and lemons and advertise your business -- all of which requires money (capital). You bring $80 and your friend $20 and the business is launched with a starting amount of $100. Now, if you decide to break this into units of $10 each you can create 10 "share" for your lemonade business. You will own 8 shares and your friend will own 2.
When the lemonade stands sells lemonade, it will receive money – we call that revenue. Lets say your stand sells lemonade for one whole year and receieves $500 as revenue, and to make make all that lemonade and keep the stand working you spent $450, your business would be left with a profit of $50. So, how do you divide the profits -- in this case $50? The shares come in very handy. Since you own 8 shares, you get to keep $40 of the profit (for 8 shares) and your friend will get $10.
What does "going IPO" mean?
Suppose your lemonade stand is very successful and you decide to create more lemonade stands in other neighborhoods, your business will need even more money. If you don’t have money on you, you could go to other folks (investors) and give them shares in exchange for their money.
However if your needs are large, it is sometimes a good idea to go to the general public and sell shares. This is know as “going public”. Initial Public Offer (IPO) refers to the very first time that a company offers shares to the general public. As you can imagine this is a very important event for a company. Investors will want to know what you are doing with their money. So if you "go public" you had better be prepared to share information about your business with the outside world.
Why go public?
There are many reasons for why companies “go public”. When businesses need money to grow, going to the public and selling shares is usually a good idea. Some companies list their shares on stock exchanges, which provides an opportunity for their employees to sell shares that they received when they joined the company. Sometimes, a country's laws and regulations could also force companies to go public as is the case with Facebook. In the US, the Securities and Exchange Commission (SEC) requires that companies with more than 500 shareholders should "go public".
So, should everyone run out and buy Facebook shares? That is up to the individual, how much money they have to invest, and whether they believe in Facebook's future.