An IPO on the stock exchange: how does a company turn shares into real money?
A company that wants to grow, expand, or develop new products needs one central thing: money. Sometimes that money comes as a bank loan, sometimes from private investors—venture-capital funds or angels—and sometimes from the general public through the stock exchange.
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This is exactly where an offering comes in. In this process, the company offers the investing public the opportunity to buy its securitiesA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits.—usually shares or bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest.—and in returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. it receives cash directly into its treasury.
On paper, this sounds simple and ideal: the company needs financing, investors are looking for an opportunity, everyone buys, and everything is wonderful. In practice, an offering is a dramatic, complex, and emotionally charged event. It determines the market value at which the company will begin trading, how much capital it will manage to raise, who will receive the shares, and what the public knows about the inner workings of the company before putting money into it.
Glossary of the offering world
So that you do not get lost among the paperwork and reports, let us clarify the terms that confuse most beginning investors:
OfferingWhat is it?
A process in which a company raises money by selling securities.ProspectusWhat is it?
The company’s official and complete identity card. A comprehensive legal and financial document that reveals all the numbers, plans, and risks.UnderwritersWhat is it?
The professional entities—usually investment houses or banks—that accompany the company and manage the marketing and pricing of the offering in the market.AllocationWhat is it?
The actual distribution of the shares. The process that determines how many shares you will actually receive in your account out of the quantity you asked to buy.DilutionWhat is it?
An increase in the company’s total number of shares, which causes each existing investor’s relative share of the pie to shrink.
The road to the stock exchange: the stages of an offering and the underwriters’ role
An offering can be an initial public offering (IPO)—when the company enters the stock exchange for the first time—or an additional offering—when a company that is already traded raises more money from the public. The stock exchange’s official offering guide describes a series of predetermined stages:
- Working meetings with underwriters and advisers
- Checking compliance with threshold conditions and criteria
- Examining market conditions and demand
- Publishing a final prospectus to the public
- Receiving orders, allocation, and a ceremonial opening of trading
Within this whirlwind, several parties operate around the company: underwriters, distributors, offering advisers, lawyers, accountants, appraisers, and the stock exchange itself. The underwriters help the company prepare the process, examine demand from large institutional investors—such as pensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. and insuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. entities—market the offering, and sometimes also assume a certain responsibility for buying securities that are not sold.
What is a prospectus—and why is it not a buy recommendation?
The prospectus is the central and most important document the company publishes before approaching the public. Make no mistake: it is not a glossy marketing brochure. It is a rigorous legal and accounting document intended to provide investors with full disclosure: what the company does, how it earns money, who the controlling shareholders are, what its financial position is, what the risks are, what the capital structure will look like after the offering, and what the money is intended for.
In Israel, as a rule, every offer or sale of securities to the public must be carried out under an official prospectus whose publication the Israel Securities Authority has permitted, or under the exceptions established by law.
Most people will not read hundreds of pages, but a private investor needs to know what to pay attention to: what the company does, whether it is profitable or losing money, what the risks are, who the controlling shareholders are, how many shares there will be after the offering, and at what valuation it is asking the public to invest.
Where does your money really go?
Before checking whether the offering is “hot,” you need to ask why the company needs the money at all. There is an enormous difference between the following two situations, which are sometimes combined:
Where does the money go?
| Aspect | Issuing new shares (pure capital raising) | Offer for sale (sale of existing shares) |
|---|---|---|
| What happens? | The company creates new shares and sells them. | The company’s current shareholders—entrepreneurs, founders, or existing investors—decide to sell part of their personal holdings to the public. |
| Where does the money go? | Your money goes directly into the company’s treasury. It will use the money for growth, investments, product development, ongoing operations, or reducing burdensome debts. | The money does not go into the company; it goes directly into those owners’ pockets. |
Both routes are legal and legitimate. But the meaning for the investor is different. If the money goes into the company, examine its plan for the money. If the existing shareholders are selling, you need to ask why they are selling now and on what scale. Not every shekel in an offering develops the company.
How is the price determined, and what is an “allocation”?
One of the major questions is the price at which the company will sell the shares. The price is affected by the company’s valuation, market conditions, its field of activity, profitability, risks, and the underwriters’ ability to generate demand from institutional investors.
Sometimes the price looks “cheap” to attract buyers, sometimes it is too high because of enthusiasm, sometimes the share will soar on the first day, and sometimes it will crash as soon as trading opens.
The balance of power: advantages for the company versus risks for the investor
Why is an offering good for the company?
It gives the company access to the public’s money without taking a loan from the bank and allows it to grow, buy companies, develop products, and strengthen its balance sheet. In addition, a public company gains greater exposure and credibility with suppliers and customers, and it is easier for it to raise capital in the future.
The price the company pays: Strict reporting obligations, exposure of sensitive information, dealing with market expectations, and living under a magnifying glass with a share price that changes every day.
Why is an offering not always good for investors?
Because an offering is also a sales event. The company, the owners, and the underwriters want the offering to succeed and raise money at the highest possible valuation. Sometimes companies are offered when the market is especially strong and investors are willing to pay any price, or even before the company has proven profitability at all.
In an offering, the company sells you a story about the future—your job is to check whether the price of that story makes sense, and not to buy only because of noise or because “everyone is in.”
And where does dilution come in?
When a company issues new shares, the total number of shares grows, and the relative portion held by existing shareholders shrinks.
A simple example
If there were 100 shares and you held 10, you owned 10% of the company. If the company issued another 100 new shares—so there are now 200 shares—and you still hold your 10 shares, your portion fell to 5%.
Is that bad? Not always. If the company uses the money to create enormous value, the entire company will be worth much more, and your 5% will also be worth more than the original 10%. But if the offering is made at a low price or without a good plan, the dilution will hurt you. We will expand on this in another blog post.
📋 Checklist: essential questions before participating in an offering
If you do not have a basic answer to these questions, you do not really understand what you are buying:
Before participating in an offering
- What does the company actually do?
- Is it profitable, or is it still reporting losses?
- Why is it raising money now, and what is the money intended for?
- Does the money go into the company’s treasury or into the pockets of existing shareholders?
- At what market valuation is the company being offered?
- Who are the controlling shareholders, and what remains in their hands the day after?
- What are the main risks stated in black and white in the prospectus?
- Are the interested parties’ shares subject to a lock-up, or can they sell soon?
- How many shares will actually be held by the public, and will there be enough tradability?
The bottom line
An offering is not an automatic financial opportunity; it is a business proposal in every respect. As investors, it is not enough to ask whether there is “talk” about the company or media noise. You must understand what the company is selling, who is selling, where the money is going, and at what price you are being offered entry into this partnership.
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Sources and links
- Securities Law, 1968—National Legislation Database — The legal basis in Israel for the obligation to publish a prospectus when offering or selling securities to the public.
- Israel Securities Authority and the Tel Aviv Stock Exchange—Guide to the initial public offering process in Israel — A guide describing the stages of preparing an offering, publishing a prospectus, underwriting, making an offer to the public, and opening trading.
- Israel Securities Authority—Authority website — Information and professional publications by the Israel Securities Authority on prospectuses, underwriting, distribution, and public offerings.
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