How many shares does a company know what to offer?

[John Connor]

So I don't really have an real answer yet. I googled it and found something from Yahoo answers, but I'm still confused. The only thing I can come up with is that it depends on how much the company is worth. So if that is the case how do they choose how many shares to sell? You can have a 1,000 shares at 10 bucks which would be worth $10,000.00, right?

 

[Mark R]

I don't understand the question.

Do you mean when a private company first decides to offer shares to public investors (i.e. initial public offering or IPO)?

If so, then the management/founders of the company will decide how much of the company to sell as shares, and how much teh founders want to keep. This may depend on what the company wants to do. If the company needs $1bn cash to buy a factory off another company, or perhaps they want the money to expand into another region, then they may base this calculation on the desired amount of money to be raised.

They will then have a bunch of accountants and financiers in to estimate the value of the company, and the size of the market for the shares. These guys will do some market research among investors and look at other stocks in the same industry, growth prospects for the current business, etc. when deciding what the company should be valued at. Typically, this whole process will be supervised by an investment bank or a specialist stock broker.

The job of the broker is to get the best possible price for the new shares, for the least amount of the company, while obtaining the desired amount of new cash. The guys that supervised the facebook IPO got the deal of the decade. They sold the new shares at about $35 each, whereas now that the price has stabilised and the "market" has found its price, the shares are worth about $24.

During the dotcom stock bubble, the opposite would tend to happen. The IPO price would massively underestimate the value of the stock. The company would get a relatively bad deal, and investors would get free money.

 

[costajohnson]

Sometimes, it is true. While in most cases, it is not.

 

[sm625]

umm Facebook is actually trading above its IPO price. Of course this is due to massive Federal Reserve manipulations and general euphoria that accompanies this part of the cycle, but still, facts are facts...

 

[piasabird]

Companies are bought and sold for different reasons.
At IPO the company's purpose is to initially raise money to run the company. So they set a price per share and if people like that price they buy the stock. If not after the IPO the price falls and they they undercut the initial price, depending what people percieve it is worth.

A lot of things goes into a value of a stock. A stock price is based on future value. Investors look at things like earnings reports, Cash reserves on hand Sales forecasts, past sales, etc. They also look at trends. Is the stock increasing in value or decreasing in value and is that trend likely to continue.

Facebook makes money by advertising. If there is a lot of advertising a lot of money can be made. I dont thing the fed makes much difference. The Fed is propping up the Bond Market so if a company is making money off of revenue (Investment Fund) then they might be affected by changes in investments like bonds and stocks. Almost all companies have a revenue fund. In fact in a slow market economy, some companies make more money from revenue and less from their actual business.

 

[alkemyst]

I'd sign up for a basic ECO100 course.

 

[sparker1]

I thought share valuations were based on a company's net asset value.

 

[SecurityTheatre]

I thought share valuations were based on a company's net asset value.

That is only a tiny fraction of the valuation.

For example, a a MASSIVE and hugely profitable consulting firm, might have assets that consist of a few thousand laptops and the desks and chairs. Maybe $10 million in assets? They might have $50 billion in revenues and $2 billion in profit and be worth many billions of dollars as a company.

On the other hand, a company that smelts steel at a loss might have $100 million in assets but only $10 million in revenues and suffers a $3 million per year loss. This company may actually be worth LESS than their net assets, depending on how bad their debt situation is, and what kind of outstanding obligations they have.



Realistically, I think the share price of a company is simply set by people's estimate of the value of the company, divided by the number of shares a company tries to sell.

Say the company decides to sell 1 million shares (this is an arbitrary number) that represent a 40% stake in the company. If the investors believe the offering is worth $10 million, they will pay $10 per share for them (since there are 1 million). If they, instead, only offer 100,000 shares, the same investors will pay $100 each for them (since there are 100k of them). Both are essentially the same thing, although one is harder to divide into smaller chunks.

In practice, for psychology reasons, businesses seem to like to keep their share price around the "every day" that people are used to. This means they release a number of shares that will make each one worth between $5 and $100.

When the value per share gets very high, often they "split" the shares, making each one half the price (but you get double the number). Someone who paid $100 for a share suddenly has two shares worth about $50. Nothing changed except the psychology of it. People hesitate to shell out for shares that are $800 each, and also hesitate to buy "junk" that is worth less than $5. Just psychology, though, because those numbers mean little without accounting for the actual market capitalization (total shares times share price).

 

[CPA]

Companies are bought and sold for different reasons.
At IPO the company's purpose is to initially raise money to run the company. So they set a price per share and if people like that price they buy the stock. If not after the IPO the price falls and they they undercut the initial price, depending what people percieve it is worth.

A lot of things goes into a value of a stock. A stock price is based on future value. Investors look at things like earnings reports, Cash reserves on hand Sales forecasts, past sales, etc. They also look at trends. Is the stock increasing in value or decreasing in value and is that trend likely to continue.

Facebook makes money by advertising. If there is a lot of advertising a lot of money can be made. I dont thing the fed makes much difference. The Fed is propping up the Bond Market so if a company is making money off of revenue (Investment Fund) then they might be affected by changes in investments like bonds and stocks. Almost all companies have a revenue fund. In fact in a slow market economy, some companies make more money from revenue and less from their actual business.

I think John is asking how do they determine the worth of the IPO, which is a matter of two variables - IPO price and amount of stock to be issued.

This is what the job of an investment company/investment bank is for. They determine the value of the company to the market and how many shares to be offered to the public - remember a majority of the shares may actually end up being held by management. Value fluctuates based on market demand for the company's shares pre-offer, just like it does post-offer. That's why IPO price can change before the initial offering is made.