A Gap in Knowledge

Discussion in 'Ask any question!' started by Juggernaut14, May 24, 2020.

  1. Juggernaut14

    Juggernaut14 New Member

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    Hello All,

    I have been dabbling in stocks for a while but recently got a bit more serious about it. I opened a trading account two months ago and then also took a udemy stock course. There is one thing that I am a bit unsure on that I would like some clarification on.

    in the stock course I was told that initially when there is an IPO the bank does the underwriting and then buys all the shares that the company wants to sell at a fixed price which both parties have agreed upon. I am a bit confused as how the shares then get back to the company?

    Also, another question I had is if there is company x and they have a 100 million shares and the share price is rising, how exactly is that money then going to the company?
     
  2. Stoch

    Stoch Well-Known Member

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    1 The company gets paid by the underwriter when the shares are issued, then they are sold to the public by the underwriter. The only way the company can get them back is to repurchase them on the market from the new shareholders.

    2 The company shares in the float (the shares already issued) will increase in price but the company does not receive any benefit unless they still hold unissued shares or shares they previously bought back from the market.
     
    #2 Stoch, May 24, 2020
    Last edited: May 24, 2020
  3. Juggernaut14

    Juggernaut14 New Member

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    I see. So let me see if I am understanding this. The underwriter buys all the shares from the IPO company thus giving the company a lot of cash right at that moment. So in the example above lets say company x is valued at 100 million dollars. That equals to 1 dollar per share. So the underwriter gives that money directly to the IPO company giving them an extra boost of cash. Also, I believe the underwriter charges a small fee for taking on the underwriting.

    Also, how does the price change when the underwriter is still holding a lot of shares? Lets say a month after IPO launch day the underwriter still has 20 million shares unsold. How does that affect the stock price?

    Lastly, is it the usual case that company buys their shares back from the underwriter/market? I ask because wouldn't the underwriter holding most of the shares make them majority shareholder?
     
  4. Stoch

    Stoch Well-Known Member

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    1/ Correct, the company gets a big payment from the underwriter, the the underwriter sets the initial price offering (usually at a premium) for investors. If the offering in under subscribed (not enough buyers) the underwriter can hold shares or sell the at whatever price will liquidate them. ie a lower price than the offering.

    2/ The underwriters usually want to liquidate all their holdings to recoup their investment (and a profit) so they can pay back the loans they may have taken out and to go on to underwrite something else. I don't think they generally hold shares for long. The company does not buy them back from the underwriter, rather from the open market.
     
  5. Juggernaut14

    Juggernaut14 New Member

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    This is making more sense now as I was a bit confused as to how the IPO company gets money when going public. So in this case with the example the underwriter pays company x $100 million dollars and would most likely try and sell the shares for something like $1.50 per share thus making $150 million plus their underwriting fee?

    Lets say the underwriter sells all the shares of company x. At that point company x would not get any more money from stocks unless they issue more right? Also, lets say that company x buys back 10 million shares from the investors and then they hold on to it for the price to grow. Lets say the price doubles and then they sell 2 million shares. This would be an example how that company would make money from the stock market?
     
  6. Stoch

    Stoch Well-Known Member

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    Correct, the company and the underwriter agree on a price, the underwriter sets the price to sell to the public depending on the level of interest of subscribing investors, who usually get a discount to the expected offering price. The shares then start trading to the public, usually higher than the subscription price, so the underwriter makes money and the initial subscribing investors can also flip their shares at another markup when the shares start trading to the public.

    Company s can also issue more shares or sell the shares they own if there is a need for additional capital and they dont want to add more debt.
    Think of a real estate trust that wants to buy additional properties. They often sell shares with the expectation that the additional income which will be given to shareholders will offset the drop in share price from the dilution..
     
  7. Juggernaut14

    Juggernaut14 New Member

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    When you talk about subscribing investors are you talking about big institutions that buy quite a lot of stocks? so after the sale of stocks to the underwriter then the underwriter controls the price to sell to the subscribing investors and also controls what the price will be on launch day?

    I see that makes sense. In the case of the reit selling their shares would it not be straight profit as they are not issuing new shares they are just selling the existing shares? or are you saying by them selling their shares the stock price will go lower?

    How does a company reacquire their shares? what would be the best way to do it? do they buy them back on the day of the launch when they would be the cheapest? I am pondering this as I know a lot of founders end up having a lot of shares so I am trying to understand that process.

    btw thanks for all theses answers stoch. This is very helpful.
     

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