Lesson Idea: Why do companies go public?

  • 8/4/2013 9:14:00 AM
  • Daniel

An interesting question to ask your students is, why do companies go public? That is, why do they offer shares to anyone who is willing to buy them?

There are lots of reasons that a company will go public, but by far the most common reason is that businesses often need capital to grow. The business generally has two options to raise the money needed to expand, first they could approach a bank and borrow the money. That will of course attract interest on the borrowing and will have to be repaid at a constant state, so if the expansion will take years to come to fruition the business must still be able to pay the loan off in the meantime. The second option the business has is to issue shares and essentially sell off part of the business. They will show off the business plan (prospectus) to investors and then list the stock on a stock exchange.

Companies can buy stock back and become a private company again, this is quite common actually, Burger King has made the transition a couple of times of the past few years.

It’s often an interesting discussion to have with you class, it’s easy to overlook the reason why a company would want to sell stock.