Most publicly traded equities appear on public exchanges through initial public o?erings (IPOs), whereby a privately traded company ?rst sells shares to ordinary investors. IPOs are usually executed by underwriters (investment bankers such as Goldman Sachs or Merrill Lynch), which are familiar with the complex legal and regulatory process and which have easy access to an investor client base to buy the newly issued shares. Shares in IPOs are typically sold at a ?xed price—and for about 10% below the price at which they are likely to trade on the ?rst day of after-market open trading. (Many IPO shares are allocated to the brokerage ?rm’s favorite customers, and can be an important source of pro?t.)
Usually, about a third of the company is sold in the IPO, and the typical IPO o?ers shares worth between $20 million and $100 million, although some are much larger (e.g., privatizations, like British Telecom). About two-thirds of all such IPO companies never amount to much or even die within a couple of years, but the remaining third soon thereafter o?er more shares in seasoned equity o?erings (SEO). These days, however, much expansion in the number of shares in publicly traded companies, especially large companies, comes not from seasoned equity o?erings, but from employee stock option plans, which eventually become unrestricted publicly traded shares.
In 1933/1934, Congress established the SEC through the Securities Exchange Acts. It furtherregulated investment advisors through the Investment Advisors Act of 1940. (The details of these acts can be obtained at the SEC website.) Today, publicly traded companies must regularly report their ?nancials and other information to the SEC, and their executives have ?duciary obligations to their shareholders. Generally, the SEC prohibits insider trading on unreleased speci?c information, although more general trading by insiders is legal (and seems to be done fairly pro?tably by these insiders).
Capital ?ows out of the ?nancial markets in a number of ways—through dividends and share repurchases, or more dramatically, through delistings and bankruptcies. Many companies pay some of their earnings in dividends to investors. Dividends, of course, do not fall like manna from heaven. For example, a ?rm worth $100,000 may pay $1,000, and would therefore be worth $99,000 after the dividend distribution. If you own a share of $100, you would own (roughly) $99 in stock and $1 in dividends after the payment—still $100 in total, no better or worse. (If you have to pay some taxes on dividend receipts, you might come out for the worse.) Alternatively, ?rms may reduce their outstanding shares by paying out earnings in share repurchases. For example, the ?rm may dedicate the $1,000 to share repurchases, and you could ask the ?rm to dedicate $100 thereof to repurchasing your share. But even if you hold onto your share, you have not lost anything. Previously, you owned $100/$100, 000 = 0.1% of a $100,000 company, for a net of $100. Now, you will own $100/$99, 000 = 1.0101% of a
$99,000 company—multiply this to ?nd that your share is still worth $100. In either case, the value of outstanding public equity in the ?rm has shrunk from $100,000 to $99,000.