An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalist or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they’re not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as “going public.”
Going public raises a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors.
Being publicly traded also opens many financial doors. Because of the increased scrutiny from analysts and investors, public companies can usually enjoy better (i.e. lower) interest rates when they issue debt. Moreover, as long as there is market demand, a public company can issue more stock in a so-called secondary offering. Thus, mergers and acquisitions are easier to arrange because stock can be issued as part of the deal.
For investors, trading in the open markets means liquidity. If you are a shareholder of a private company, it is very difficult to sell your shares, and even more difficult to value your shares. A public company trades on a stock market, with ready buyers and sellers and known price and transaction data. The stock market is therefore referred to as the secondary market, since investors are buying and selling stock from other public investors and not from the company itself. Public markets and liquidity also makes it possible for a company to implement benefits like employee stock option plan (ESOP), which help to attract top talent.