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What is a Public Offering?

Wilbert Bledsoe
Wilbert Bledsoe

A public offering is the sale of company stock or equity shares to the public. Generally, corporations both small and large use stock sales as a method of raising capital for expansion or investment. That stock can be issued in a private offering — to a select group of private individuals — or it can be offered to the general public. When it is offered to the general public, it's usually offered in one of two types — common stock or preferred stock. Purchasers of the stock offered in public offerings are often individual investors, companies and brokerage firms.

Prior to offering a stock, the issuing company will often enlist the services of an underwriter. An underwriter — usually an investment bank or brokerage firm — will determine the number of shares and the price of each share to be offered for sale. It will then buy those shares from the issuing company and resell them to the public. Interested investors often purchase stocks from a broker for a predetermined public offering price.

Man climbing a rope
Man climbing a rope

The most common type of public offering is the initial public offering or IPO. In short, an IPO is the first time a company offers its stocks to the public for sale. Usually, smaller and younger corporations make an IPO to raise capital in order to expand.

In order to raise additional funds, some companies issue more stocks to the public in a subsequent offering, also known as a secondary public offering. A stock issued during a subsequent offering may be sold at a lower price to influence greater sales. Unlike an IPO, stocks sold in a secondary offering are usually held by the issuing company’s current shareholders. Cash generated by the sale may be used to refinance debt, help the issuing company diversify its holdings, or generate more capital quickly to spur even faster expansion.

A public offering may benefit a company in many ways. The exposure from the announcement of its stock sale may bring in new investors or provide greater assets to loans from lenders. It is also likely that going public will help the issuing corporation retain or hire top notch employees because the influx of new capital may signal growth.

In contrast to public offerings, companies may raise capital by way of private offerings. These stocks are not offered to the public at large; rather, they are offered to a small group of private individuals — usually less than 30 or 40 people. These potential investors may or may not work for the company.

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