Question

o Equity Markets

• Discuss the role of the various stock exchanges in the equity market and determine if they are used for initial public offerings.
• What is an initial public offering (IPO) and why would a company follow this course? How do companies determine when they will go public?
• An IPO can be used to buy out a venture capitalist. How does this work, and what role could a venture capitalist play in the growth of the company?
• Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO?
• 200 words

Answer 1

1. Equity stock market provides a platform where people can buy and sell shares.

The primary role of stock market is to provide liquidity to the market participants.

Shares become available on an exchange after the company issues shares to the public via an IPO who can then trade their shares on the stock exchange.

2. When private companies decide to go public, they raise money from general public through an IPO.

The company usually decides to go public, when its revenue is predictable and consistent, and the business is growing. The venture capitalists may use it as an exit strategy.

3. Venture capitalists fund the startup companies in early stage where they feel that there is growth potential. They fund the companies and provide necessary expertise and technology and bear the associated risks in the hope of a success. Once the company is successful, they may take the company public and exit out of the investment.

4. A prospectus specifies how the proceeds of the offering are to be used, the past performance of the issuing firm, the risk involved in the firm's business, and the price range in which the shares will be offered.

The firm does a road show mainly to promote its offering to the investors.

The offer price is influenced by market conditions, industry conditions, and the prevailing market multiples (such as price/earnings ratio).