Investments, tenth edition

  Publicly Traded Companies 

 When a private firm decides that it wishes to raise capital from a wide range of inves-

tors, it may decide to  go public.  This means that it will sell its securities to the general 

public and allow those investors to freely trade those shares in established securities 

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6/18/13   7:44 PM

6/18/13   7:44 PM

Final PDF to printer

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  C H A P T E R  

3

 How 

Securities 

Are 

Traded 

61

markets. The first issue of shares to the general public is called the firm’s    initial  public 

offering,   or  IPO.    Later, the firm may go back to the public and issue additional shares. 

A  seasoned equity offering  is the sale of additional shares in firms that already are pub-

licly traded. For example, a sale by Apple of new shares of stock would be considered a 

seasoned new issue. 

 Public offerings of both stocks and bonds typically are marketed by investment  bankers 

who in this role are called    underwriters.    More than one investment banker usually  markets 

the securities. A lead firm forms an underwriting syndicate of other investment bankers to 

share the responsibility for the stock issue. 

 Investment bankers advise the firm regarding the terms on which it should attempt to 

sell the securities. A preliminary registration statement must be filed with the Securities 

and Exchange Commission (SEC), describing the issue and the prospects of the 

 company. When the statement is in final form and accepted by the SEC, it is called the 

   prospectus.    At this point, the price at which the securities will be offered to the public 

is announced. 

 In a typical underwriting arrangement, the investment bankers purchase the securities 

from the issuing company and then resell them to the public. The issuing firm sells the 

securities to the underwriting syndicate for the public offering price less a spread that 

serves as compensation to the underwriters. This procedure is called a  firm commitment.   In 

addition to the spread, the investment banker also may receive shares of common stock or 

other securities of the firm.  Figure 3.1  depicts the relationships among the firm issuing the 

security, the lead underwriter, the underwriting syndicate, and the public.