Episode #106: “Wall Street Debut: What It Really Means to Go Public”

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Transcript

Speaker 0:01

Welcome to the Fiscal Physical Podcast. Join us this week as we sit down with the founder of Alchemy Wealth Management and author of your physical physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody. This week's episode of the Fiscal Physical Podcast. My name is Aaron. I am here with uh founder of Alchemy Wealth Management, uh Ryan Nelson, also a published author. Uh Ryan, how are how are you doing today, my man?

Ryan Nelson 0:46

I'm doing really well. How about yourself?

What An IPO Really Means

Aaron Hoisington 0:48

You know, I can't complain, can't complain. I'm uh ready to ready to get some uh more financial knowledge under my belt here. You uh you ready to get started? Let's do it. All right. So today we are going to talk about what going public means, or I think it's from simple Googling, like an initial public offering. So we've all probably seen a movie or you know, heard, oh, this company's going public, or you know, what and so I uh but I don't actually know exactly what goes into that or what that means or how that like affects, I guess, investors or anybody along those lines. So I'm kind of hoping you can break down what going public means and see if like you know, when you dip debut on Wall Street, what actually happens? You uh you think that's something you could uh break down for our listeners today?

Primary vs Secondary Markets

Ryan Nelson 1:35

Yeah, let's do it. All right. So basically what going public means, um, which, like you said, an IPO initial public offering, it's when a private company begins to sell their shares to the general public. Okay. So up until then, um the owners, sometimes employees of the company can potentially own shares of the organization, but this is the first time that it would just be sold on to the general public where somebody like you and I could actually buy and and start um having ownership of them. So all the companies out there that you've heard of that are trading on the stock market, the you know, the Walmarts, the Targets, the Googles, the Nvidia's, um, they've all already gone through an initial public offering and they're therefore now offered to the public. Okay. Um so w w one thing I think is a little interesting is is the difference between the primary market and secondary market. So when you think about buying, like if you're picturing buying, say, Apple uh a share of Apple Computers right now, sure, you'd actually be buying it on the secondary market. Oh, really? So I own a share. Right. I'm trying to sell it, you don't own a share, you're trying to buy it. Sure. I sell mine, you buy it, that's on the secondary market. You can see how Apple Computers wasn't actually involved in that transaction. Right. So the initial public offering is the offering where Apple Computers sells the shares of Apple directly to the public. Outside of that, once they do that initial sale, so maybe I am part of the IPO, I buy the share, I buy uh the stock of Apple. Now anytime I sell it to another individual, that's on the secondary market. So everything on the New York Stock Exchange or the Nasdaq, that's all the secondary markets. So primarily, almost entirely, every time you're buying or trading a stock, it's going to be on the secondary markets.

Aaron Hoisington 3:20

That's wild. I I mean I probably should have known that, I'm not gonna lie, but I maybe I had that lodged somewhere in my brain. But I kind of think about it like two of the like when you buy like tickets like two for a football game or something like that. Very similar. You buy it on the secondary market because you know, like if you're a seasoned ticket holder though, you're you got in on like that quote unquote IPO. Like that's where you kind of get it in. But if not, you're buying it on Ticketmaster, wherever like it's like that secondary market piece of it.

Values And Investor Impact

Why Companies Go Public

Pricing An IPO And Underwriters

Ryan Nelson 3:46

So so similarly, every time I go to a Packers game, they sell out every they've sold out every single game for I don't know. Forever. Yeah, exactly. So so I'm never able to get a ticket directly from the Packers. Sure. So they sell out, they sell all their season tickets to all their seasoned ticket holders. Then some seasoned ticket holder can't go, they're selling it directly from me. Right. The the that that person selling to me on the secondary market or through ticketmaster is the one profiting from it. Green Bay isn't profiting from it, they profited from selling the original ticket. Sure. Which is kind of interesting because I think we talked about this back on an episode where we talked about ESG investing. Um, you know, if I want to uh like if I don't if if if I don't believe in company XYZ and I want to avoid supporting them, oftentimes um, you know, our first reaction may be not to buy company XYZ stock. But if we think about it, actually, if I buy company XYZ stock on the secondary market, the money I'm paying for that stock actually isn't going to company XYZ. It's going to Joe Schmoe, who's looking to sell a share of company XYZ, right? So what's interesting is if I want to have an impact on my investments, you know, maybe avoiding those investments isn't the most impactful. Actually, buying company XYZ. I'm not giving any in theory direct profit to that company. Um, but now I'm able to vote for the company, right? I have some voting rights and other things. So um yeah, interesting in in having that good understanding of the initial um kind of the initial offerings versus the the secondary markets are important. Yeah, super. So um what are some of the reasons why a company would go public? Um so oftentimes you'll hear about these companies that are growing, you know, they're these quote unquote smaller companies, they keep growing, and then at some point they'll go public, right? And oftentimes it's to raise capital. Um, and so you can only raise so much money, right? There's only only so many investors out there who want to write these big checks to you, right? Um, but it a good way of raising a lot of capital is to do an IPO and sell your shares to like everybody. Everybody, right? And now this lets kind of all the you know a lot more people access to buying your shares, which can then therefore generate a lot more revenue um for you so that you could maybe you know fund a capital project or an expansion or an acquisition or something like that. Um it also might make the the people who do own the company wealthy, right? Which is one of the reasons why they may have started the company. Yeah, um, it also gives liquidity to early investors. So oftentimes I'll have clients come to me and ask if you know they might have access to buy into their company, which is not publicly traded. So they'll say, Oh, I can buy in, you know, my company's offering me the ability to buy into it, should I? And you know, whether they should or shouldn't is a very unique question. But one of the things that they need to consider is what is the liquidity? Once they buy this company, how are they gonna sell it? Right. Oftentimes they can't sell it. And and it's this like pipe dream that they hope that company will one day go public and then they can sell the share, right? Um, but so it's really important to pay attention to is if it hasn't yet gone public, um, are they able, you know, are they able to are the employees able to liquidate those shares? So one of the benefits is when a company does go public and they do their IPO, now all their employees and owners can now start to liquidate some of their shares. Interesting. Yeah. Um it also creates a little bit of brand credibility and public visibility. You you'll hear now their stock ticker and you'll see them on the CNBC or you know, maybe um, you know, some news pundit will start talking about them more about their stock, right? So maybe we'll generate a little more um publicity and marketing for their company.

Aaron Hoisington 7:24

Yeah, well, I I think about it. If I see you know it's a publicly traded company, immediately I'm like, oh, okay, they have must have like oversight and all these different things to ensure that they're a you know a worthy brand, I guess, to kind of buy, which maybe is a little bit of a pipe dream. You don't really know what goes on behind the closed doors. But at the same time, like if I see something that's traded publicly, I I feel more confident that I guess they're not gonna immediately go under, I suppose. For sure. Whether that's true or not, I don't know. But like I think it's something that definitely Yeah, there's a perception.

Benefits And Drawbacks Of Listing

Ryan Nelson 7:55

Yeah, perception of it for sure. Um so so let's say I'm company XYZ and I now I've been private, now I want to go public. So there's never necessarily like how would you price what it should be? Right. Yeah, great question. The nice thing about like Apple Computers or some company that's been publicly traded for a long time, there's been thousands, right? Probably millions of transactions of Apple, so thousands of people buying, thousands of people selling, all coming to a balance, right? Supply and demand has dictated what the price of their company is worth and how much a single share should be worth. But if I'm at company XYZ just trying to sell for the very first time, there hasn't been these thousands of transactions and supply and demand dictating what my company's worth, so it can be hard to price. And you'll see a lot of companies do get this wrong. But basically, what you do is you'd hire an underrater, underwriter, they would estimate the company value and then do some testing and basically try to set a price based on what they believe the investor interest will be based on those current market conditions. And so, you know, maybe we come out and we say, okay, that you know, my company XYZ that I'm going public with is um, you know, the stock price, we think it's worth 20 bucks a share, right? So we put it at 20 bucks a share. And oftentimes you might see it like, you know, they'll the word they'll use is pop. It might pop up to like $40 a share. Yeah. So it's like, oh, we got it wrong. Yeah. People actually thought it was worth $40 a share. And that's like devastating for the company because what that means is they just sold it to the public at $20. Right. They only got $20. Now on the secondary market, they're trading it. So I could somebody else, Joe Schmok, could have bought it for $20, turned around and sold it for $40 when it pops up, right? And so it's like, wow, they they may have left half of the revenue they could have raised on the table, right? Um, or sometimes you'll see them price it, you know, at $10 and then it will immediately start falling to five or something, and and um that can be devastating for their reputation. Yeah. You know, it just uh again, while it doesn't change the quality of the business, there might be people who then have a completely different perception of that business with, oh yeah, their stock immediately went from 20 bucks to five. Whereas it's like, well, the quality of the business was exactly the same, they just mispriced it.

Aaron Hoisington 10:08

Exactly. Is there is there a word? I mean, if it the stock pops, is there a word for like the opposite of that? I don't know if drops drops is crash pop. I don't crash drop.

Ryan Nelson 10:16

I was just curious if like probably drops, I guess.

Aaron Hoisington 10:18

Because I definitely hear you hear more of like the pop. Yeah, it popped, but I was just curious if there was a and not that I can think up off the top of my head, but yeah, it should probably just drop or like crash.

Ryan Nelson 10:28

Makes sense. Um but yeah, so the underwriters are gonna estimate the value of the company, they're gonna kind of try to test it, they're gonna set that price, and then we'll and then really you put it to the to the the the IPO, the public market, and and you see kind of what happens. Um so some benefits. We touched on a little bit of this, but some benefits of going public would be you can now gain access to a significant amount of capital, you have that stronger brand reputation, um, there's liquidity for all the shareholders who already own shares. You can now start using those uh shares to help try to attract talent. Um so you might hear again companies like a Tesla or an Nvidia using stock options as a way to incentivize um uh attracting employee talent and retaining that employee talent, um, which is a nice little tool. Um and uh they can also use it as a tool for acquisitions. But as with everything, there's also some drawbacks of going public. So you may have heard people or companies say that they'll never go public.

Speaker 11:33

Right.

Public Scrutiny And Media Pressure

Ryan Nelson 11:34

Um and some of that would be there's a loss of privacy. So you're gonna be held if you're a publicly traded, you're held to these higher levels of transparency requirements and public reporting. So the public reporting itself is cumbersome, expensive, time consuming, and you have to have this level of transparency. Um so you may say, hey, it's not worth it. Uh either A, we don't want to share something to our competitors, we don't want our competitors to know this about our business, so we don't want to go public. Um, or we don't want to spend the time and energy to do the quarterly reportings. And the other thing is now in theory, you're beholden to your short shareholders. Yeah. So now this thought that you know the shareholders, you're kind of working for them, whereas the shareholders might be impatient. So they may demand sort of quote unquote demand return soon, where you may have a longer-term approach and say, I want to do this investment or this thing or take this strategy that may have a negative implication in the short term, but hopefully long-term positive implications, that may not go over so well for a publicly traded company, but may be brilliant for a publicly traded company who has the ability to do that. Right. That makes sense. So, yeah, that kind of that pressure from shareholders, um the the stock volatility can distract um, you know, from your leadership team. And um, so yeah, I think you know, with any it also opens up this uh yeah, this kind of window into your company where yeah, that like I mentioned before, there's now there's maybe these, you know, these pundits on TV talking about your company, scrutinize scrutinizing your company, whereas before they just never cared to talk about it because it wasn't publicly traded, right? So, you know, while you may get, you know, we were talking about on the positive side, you may get more um sort of attention. Some of that attention could be negative attention, right? Um, or fires that your PR problems that you're having to put out. So, yeah, as with anything, I think it's both there's both positives and negatives to going public. But hopefully that gives you a bit of an idea of sort of what going public means and the difference between the the the IPO and the secondary markets. 100%.

Aaron Hoisington 13:43

I mean, I already feel like I learned so much today, just in general, hope everybody else did as well. But I I think about like you mentioned just the scrutiny piece or scrutiny piece of it, like especially in nowadays. Like, I mean, you think about like Boeing, like, for example, like they had that video pop out where they they lost a door on the airplane, which obviously terrible, don't want to do that. Like, and it opens up this intense like scrutiny publicly to be like, we want a full investigation of all this different things, which I I totally get. I think it's valid in a certain case, but I mean their stock dropped quite a bit after that. Don't know where it's at now, it's probably back if we're being honest. But um, and just nowadays with everything being going viral, or like you what's the guy who's on the he's an older guy, but he used to like be like, bye, bye, bye, so Jim Kramer. Kramer. That's what it is. Yeah, Kramer on there too. So like if you get your name on the yelling, sell, sell, sell.

Ryan Nelson 14:30

No, definitely not.

Aaron Hoisington 14:31

Like you're like, oh my gosh. But at the same time, if you get that far, you're also like, wow, we we may have made it. Yeah. So I think it's a double-edged sword when it comes to those kind of things. But um, I think it's it this is really interesting to think about. Like, you you hit on a couple points. Is going public the best option? Depends obviously on company by company, but at least kind of knowing what goes into that and how you know what benefits could bring, drawbacks, challenges, and such, too. I hope uh kind of helps everybody paint a little bit of a picture there. But uh awesome, Ryan. Anything else to uh add here before we uh wrap up to the personal section? Nope, that'll do it. Awesome. Everybody uh hang tight.

Speaker 15:05

And now to put the personal in personal finance.

Aaron Hoisington 15:12

Welcome back, everybody, to this side of the physical physical podcast. I am still here with Mr. Ryan Nelson. And uh, Ryan, I got uh I got a question for you related to uh airplane travel. You uh you ready to roll? Let's do it. All right, so this is one I'm sure, well, hopefully, I don't know, maybe I think every one of our listeners for the most part has probably been on an airplane in some capacity. If not, good for you, I suppose. But uh when you're traveling on an airplane, uh do you prefer the window, aisle, or middle seat? Uh I think I like the middle seat the most. What about you? You know what's funny is I actually do like the middle seat. I was like I was wondering, I was like, I was curious what he was gonna do. Depends on the situation. If I'm traveling with like a couple of buddies, like sure, and I'm skits to sit in the middle and I can like talk to both of them and such. I think that that adds a huge like aspect, but if I'm just sitting next to a couple of randos, that doesn't bring me any joy whatsoever. Like I'm monopolizing the heck out of those armrests though. Like, but that's funny. Uh but I I actually like I I've been traveling with my wife and kid, and like you know, just with that, it's kind of a nightmare just in general, all around. But like if you can put your kid in the middle, you can kind of tag team it. So yeah, that makes sense. In certain cases, like, but if I was just traveling, like I'd probably go aisle myself, like it's easier to get out.

Ryan Nelson 16:27

I'm definitely an aisle guy. Yeah, like you said, if I was traveling with two friends, I think I I could see I could make an argument for middle for sure. Sure, yeah. Um, but uh yeah, no, without traveling like solo, definitely uh I like the aisle more than the window, it's just so much easier to get out if you need to re use the restroom or something you're not disrupting anybody. I feel like you have a little more room. You can encroach into the aisle a little bit. Sure. Um yeah, I'm definitely an aisle guy.

Aaron Hoisington 16:49

And it's funny, I think about the the idea of like for myself. I've I've been on many a plane, and I think about the idea of like the window, like you're really just getting to like see like stuff you've probably already seen for sure. And like with takeoff, you have like five to ten minutes of like where you can see stuff, and then it's just clouds for the most part. I'm like, everyone's already seen this, no one really cares. Like um, with it is kind of cool though when you're sitting on the window and you can kind of see the city you're entering in, yeah. If it's like the first time you've been there or whatever, like I know that when you know we fly into different places. When I flew into New York the first time, I was like, holy smokes, I was pressed up against the glass there, and uh, I was like, this is crazy. But after a while it just kind of wears off, and I'm like, I don't care what's more comfortable. Yeah, for sure. Can I snag an extra snack off of this cart? Like it's a lot harder doing that sitting in the window seat for a few years. 100%. So awesome. Well, I appreciate it, Ryan. We'll go ahead and uh pose that question to the listeners are you guys a middle, aisle, or window kind of person? So uh let us know. And uh as always, please let us know if you guys have any topics you want us to cover. Email us at podcast at alchemywealth.com. Uh you know, send us a text, whatever it is. Uh these pods drop every Tuesday, and we'd uh love to cover some of your questions. And uh with that, Ryan, I'll go ahead and uh turn it over to you. As always, stay the course.

Listener Prompts And Closing

Speaker 18:06

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical book on Amazon. We'd be remiss if we didn't mention the personal finances just then. First of all, please don't take anything we say as advised. The pre-setting content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor is it to be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.