Anybody who has played Cityville, Farmville or Zynga Poker on Facebook, will know just how popular these games are. Did you know that 270 million people play these games each month or that the company which offers these online social games is called Zynga? Zynga offers these games to play for free, but they actually make a lot of money. Yes, they earn advertisement revenue and sell virtual fertilizers and purple cows to graze on that virtual farm!
Last week, Zynga decided to file for an IPO. So what is an IPO? Is it another one of their new virtual games or something else? Let’s find out….
What are shares?
We saw here that stock or shares represent a person's ownership of a corporation. Think of it like a wall which has 500 bricks where each brick has a value of $10. The total value of the wall is $5000. If you own one brick, you are a shareholder with 1/500-th part of the wall.
When a company needs money to start or grow its business, it takes money from investors -- people who are willing to be owners or partners and lend them money. In return, the company issues them shares. Such a company is said to be “privately held”.
In the case of the wall, lets say advertisements on the wall generate a profit of $500 per year. Then as a 1/500-th share holder, you get $1 of the profits. Suppose the wall is very profitable and actually generates $5000 profit each year instead of the $500, how much will be your proportion of profits? Do you think your share will be valuable?
Successful companies could need more money than they can get from private investors. Sometimes initial owners want to have an opportunity to sell their part of the company and move on. The company offers its shares to the general public -- this is known as "going public" or IPO. The shares can be traded freely in the stock market where people like you and me can buy and sell the shares at any time.
For a company to go public, it has to get approval from financial regulators. Securities and Exchange Commission (SEC) in the US has strict rules that require companies to give out information regularly to the public about how their company is performing.
Given how well Zynga’s social games business is doing, there appears to be a lot of demand by people to own the company’s stock. It is expected that the shares may be offered to the public at several times the original value of the shares.
Investing in stocks could mean huge profits if done wisely. Remember though, if the business fails, you could stand to lose money too -- it is important to thoroughly understand the company and its business before investing in it.