Learn how corporations issue stocks and bonds, the IPO process, and assess your knowledge with FINRA Series 7 sample exam questions and quizzes.
In the world of finance and securities, corporations are central players, often acting as the primary issuers of stocks and bonds. Understanding their role, particularly in raising capital and transitioning through initial public offerings (IPOs), is crucial for anyone aiming to excel in the FINRA Series 7 exam. This article delves into the mechanisms corporations use to finance operations and strategic expansions, alongside the intricacies involved in a company going public.
Corporations need capital to fund their operations, expansion plans, and potential acquisitions. To raise this capital, they often turn to the issuance of securities, namely stocks and bonds.
Equity Financing: Corporations issue stocks to raise equity capital. When a corporation issues stock, it sells ownership shares to investors. These shares can be either common or preferred stocks, each with distinct characteristics and privileges.
Common Stock: Offers voting rights to shareholders and the potential for capital appreciation. However, it carries the risk of loss since dividends are paid at the corporation’s discretion.
Preferred Stock: Generally does not provide voting rights but offers fixed dividends and a higher claim on assets in case of liquidation compared to common stock.
Debt Financing: Corporations also issue bonds as a form of debt financing. By selling bonds, a corporation effectively borrows money from investors, promising to pay back the principal amount plus interest. Bonds are typically issued with varying maturity periods, interest rates, and credit ratings, each affecting their attractiveness to investors.
When a private company decides to go public, it conducts an Initial Public Offering (IPO). This process allows the company to sell shares to the general public and raise substantial capital.
Preparation: The company undergoes a restructuring to meet regulatory standards. This involves financial audits and assembling a team of advisors, including investment banks, lawyers, and accountants.
Filing with the SEC: The company files a registration statement with the Securities and Exchange Commission (SEC), detailing its financial information, business model, and plans for the raised capital.
Pricing: Investment banks work with the company to determine the initial offer price, balancing factors such as market conditions, investor demand, and the company’s valuation.
Roadshow: The company and its bankers present the investment case to institutional investors across various locations, gathering feedback and interest.
Launch: Shares are sold on a specified launch date. The IPO generates cash for the company and provides liquidity to early investors and employees holding stock options.
Access to Capital: The primary benefit of an IPO is access to a large pool of capital for growth and development.
Visibility and Prestige: Public companies often gain greater market visibility and prestige, which can help in attracting more business and talent.
Regulatory Compliance: Public companies must adhere to strict regulatory compliance, transparency, and reporting standards imposed by the SEC.
Corporations play a vital role in the securities industry, using stock and bond issuance as pivotal tools for capital raising. Initial Public Offerings further enable these entities to garner significant resources for expansion while opening them up to broader scrutiny and new opportunities. Understanding these processes not only supports success in the Series 7 exam but also equips you with valuable knowledge for navigating the financial markets.
Test your understanding of corporations and their role in capital markets with the following quiz questions.