After a long span of monopoly corporations running virtually every industry currently in existence, we’ve finally come back into a time where it’s once again possible for independent people to create new businesses beyond just a corner store. The reason this is possible, is because there is now a way for these individuals to gain the capital to expand their companies into a large, profitable entity.
The method behind this process is holding an initial public offering (IPO), a term that slipped into everyday speech during the heyday of the stock market in the late 1990s. In these cases, investors are able to buy stock before it technically hits the market, most often at a cheap price. In general, IPO prices are on average about 13 to 15% less than the regular trading price in order to attract more potential investors.
These IPOs are beneficial to institutional investors who are willing to buy substantial quantities of the company’s stock before its debut. These investors will usually enter into a limited partnership called a hedge fund which can consolidate all purchases of stock. Hedge funds and investment banks can end up providing an IPO company with up to triple-digit-gains just on the first day of trading.
The person that consolidates all of the results and trade information for the hedge funds for easy access is called a prime broker. All other executing brokers are instructed to complete all trades through the prime broker so they can keep a record of all transfers of funds and stock.
In recent years, as the hedge fund industry has evolved, primer brokers followed suit by taking over a multitude of other responsibilities as well. They can even manage a form of loans in which they facilitate hedge fund managers to borrow money from investment banks and security firms for investment.
Hedge Fund prime brokerage services are able to profit off of IPOs by charging fees for financing these security positions as well as any other services they may provide for the hedge funds.
Besides just offering the company the chance to generate capital for expansion, IPOs can benefit all parties involved, essentially even creating more jobs along with the growing company. More on this topic.
