The difference between subscription and stocks
The difference between subscription and stocks
One of the most important events that characterizes the stock market is the initial public offering. Here's everything you need to know to understand the difference between an IPO and a stock.
Shares are defined as securities that represent a part of ownership in a company. Owning this stock by an investor gives him a certain percentage of the company in a manner equal to the amount of shares he owns. In the beginning, companies are private, that is, they are monopolized by their founders, who only own full shares in them without external shareholders. After a certain period of construction and continuity, private companies may decide to participate in the IPO so that they can raise appropriate funding to invest more in their growth and expansion. Thus, private companies become public companies with shares listed on the stock exchange.
The IPO is a very important event in the history of stocks and companies. Below from the article, we will help you understand stocks and underwriting in a simplified and detailed way so that you can have a comprehensive understanding of the difference between them.
What are stocks?
Stocks are ownership papers that represent a part or share of a company. These shares are often bought and sold on stock exchanges. In order for companies to offer their shares for public trading, they must participate in a public offering and their offering must comply with government regulations and Securities and Exchange Commission requirements designed to protect investors from fraudulent practices.
Companies issue and sell their shares to raise the money they need to run and develop their business on a larger scale. Shareholders or investors buy a part of the company by buying these issued shares and based on the type of these shares owned, they guarantee for themselves the right to claim this part or part of the profits. The shareholder is now one of the owners of the issuing company, and the ownership share is determined based on the number of shares he owns compared to all the issued shares. For example, if a company has 1,000 shares of issued stock and one person owns 100 shares, that person will have a claim to 10% of the company's assets and profits. Shareholders do not own the companies; Rather, they own shares issued by companies. But corporations are a special type of organization because the law treats them as legal persons. In other words, companies can borrow, they can own real estate, and they can be sued. The idea that a company is considered a “person” by law means that the company owns its own assets.
But at the same time, the corporate office belongs to the company and not to the shareholders. This distinction is important because the ownership of the company is legally separate from that of the shareholders, which limits the liability of both the company and the shareholder. In the event of a company's bankruptcy, a judge may order the sale of all of its assets, but the shareholder's personal assets are not at risk. Neither the court nor any entity can force you to sell your shares, even though the value of your shares will drop significantly. Likewise, if a major shareholder goes bankrupt, they cannot sell the company's assets to pay off their debt.
Companies can issue new shares whenever needed to raise additional cash. Companies can also engage in share buybacks, which benefit existing shareholders as they cause their shares to rise in value.
Types of Stocks
There are two types of shares that a company can issue, common shares and preferred shares. Ordinary shares entitle the owner to vote at shareholder meetings and receive any dividends paid by the company while preference shareholders generally do not have voting rights, they have a higher claim on assets and profits than ordinary shareholders. For example, preference shareholders receive higher dividends than ordinary shareholders and have priority over them in the event of the company's bankruptcy and liquidation.
What is an underwriting?
The subscription or what is called the initial public offering of shares is the process by which the company offers its own shares to the general investors. Often companies participate in the subscription for the purpose of increasing their capital from investors and investing it in their growth, development and expansion.
Before participating in IPOs, companies must meet a set of requirements and conditions set by the exchanges and the Securities and Exchange Commission in order to ensure that the IPOs run in a smooth and disciplined manner. Companies often hire investment banks to market their IPO, date and demand, and determine the price that suits their stock.
How do IPOs work?
The IPO process is carried out comprehensively in two phases. The first stage is the marketing stage of the offering, and the second stage is the offering itself. When the company decides that it will participate in a public offering, it will announce it to the underwriters by soliciting private bids or it may also issue a public statement to generate interest. Underwriters lead the underwriting process and are selected by the Company, and the Company may select one or more underwriters to jointly manage different parts of the underwriting process. All underwriters participate in managing all aspects of the public offering, from document preparation, filing, marketing and issuance.
Here are the main steps for subscribing
The underwriters present their offers that talk about their services and discuss what they offer and how they manage the subscription with reference to the best type of securities that the company can issue in addition to the offer price, the amount of shares they propose to subscribe, and the estimated time frame for market presentation.
Choosing the right company for the show
At this point, the company selects its guarantors and formally agrees to the terms of the subscription through a subscription agreement.
Formation of underwriting teams
IPO teams are made up of underwriters, attorneys, certified public accountants, and Securities and Exchange Commission experts.
In the documentation stage, information about the company is collected to document the required IPO. The registration statement is the most important document necessary for subscription, and it is a document consisting of two parts, the prospectus and special deposit information. Private filing information includes preliminary information about the expected filing date which is always revised while the embedded prospectus may be continually revised.
Marketing and updates
Marketing materials are created for the purpose of pre-marketing the issue of new shares. Underwriters and executives market the share issue to estimate demand and determine the final offering price, whereby underwriting agents can conduct reviews of their financial analysis throughout the marketing process. This may include changing the subscription price or issue date as they see fit. Companies take the necessary steps to meet specific public offering requirements and companies must comply with both the requirements for listing on the stock exchange and the requirements of the Securities and Exchange Commission for public companies.
Board of Directors and Operations
At this stage, the board of directors is formed and auditable financial and accounting information is reported every three months.
The company issues its shares on the IPO date and the capital from the basic issue is received to the shareholders as cash and recorded as equity to the shareholders in the balance sheet. After that, the value of the balance sheet stock becomes dependent on the comprehensive evaluation of the company's shareholders' equity for each stock.
After the IPO, some post-IPO provisions may be put in place and the underwriters may have a specific time frame to purchase an additional amount of shares after the IPO date. Meanwhile, some investors may undergo quiet periods.
Summary of the difference between subscription and stocks:
Shares are securities that represent ownership of a specific part of the company. As for the first public offering or subscription (IPO), it is the process by which a private company becomes a public company and issues its company’s shares to the public for the first time. After the company completes the IPO process, its company is listed on the stock exchange. After that, its listed shares can be purchased from the secondary market, and the public subscription will be implemented in the primary market. When the company prepares to launch its IPO, it hires an investment bank to carry out the IPO. The company and the investment bank prepare the subscription agreement and draft the prospectus. The registration statement is then submitted to the Securities and Exchange Commission along with the draft prospectus. This committee reads the information, and once the information is verified and correct, it allows the company to announce the subscription date.
If you are an investor and want to participate in an initial public offering, you must first make sure that you research the company and get to know its basics. This is where the prospectus plays an important role for investors because it includes the company's income statements and other important financial documents. This information helps one understand whether an IPO is worth investing in or not.