Infographic: What’s An IPO Anyway? (Explained in Just Over 140 Characters)

Includes infographics

NYSE

NYSE

In case you’ve been hiding out in a cave this week (one without a dependable wireless connection, that is), you’ve probably heard that Twitter has gone public.

The microblogging platform that took the world by storm less than eight years ago, now has more than 100 million daily active users worldwide and is valued at close to $13 billion. In September, the company filed for its Initial Public Offering (IPO). And on Thursday, amid much fanfare, Twitter’s stock began trading on the New York Stock Exchange under the ticker symbol TWTR, with shares initially priced at $26 a pop.

Ok, so what does all this mean? To help demystify the IPO process, the NYSE made this nifty little cartoon, at right. Click on it to view full-size version. If questions still arise, see the text explainer below.

What’s the difference between public and private companies (and how do IPOs fit into that)?

The vast majority of fledgling companies need start-up funds, and that generally comes in the form of investments and loans. Private companies rely, not surprisingly, on private investments. Most of that usually comes bank loans or from businesses called venture capital firms that invest in companies and make money on their returns if the companies end up doing well (or, conversely, lose out if the company flops).

A private company may decide to go public if it wants more investment capital to expand its business. To do so, it files for an IPO – an Initial Public Offering. The company is essentially divided equally into tiny little units (stocks) and each unit is given a monetary value based on how much the company is estimated to be worth upon filing.. Outside investors are then allowed to purchase various quantities of shares through the stock market. Whoever buys any portion of stock in the company becomes a stockholder, meaning that individual investors stand to make money if the company does well, or lose money if it doesn’t.

If it sounds a lot like gambling, that’s because it is (minus the green felt card table).

What happens at the stock market?

The stock market is the place where shares of public companies are bought and sold by investors. Investors decide which companies to buy stock from and how many individual shares of stock to purchase. The smartest investors generally identify relatively new companies with a lot of potential that are not yet worth all that much, and whose stock value is therefore still low.

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Statistica

A good example:  Amazon. When the company first went public in 1997, its initial stock prices was, of course, exponentially lower than it is now. So those who bought in early ended up doing quite well for themselves in the long run. In fact, the site Statista estimates that $1,000 investment in Amazon when it first went public would be worth close to $240,000 today.

Darn!

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