I don’t proclaim to know a lot about the stock market, but I think I have read and learned about it more than someone who is not a finance major. So I will try my best to explain an IPO to a 10-year-old.
Say you want to make money from selling shoes. You buy your materials, and combined with your extraordinary shoemaking skills, you produce some nice shoes.
Your shoes turn out to be very popular, all your friends are coming to your house looking to buy a pair of your awesome shoes. However, the time required to make shoes for your friends is so long that you can’t do it alone. So you hire some friends to join you.
Business is good, but you want more. You want to sell not only in New York, but in all 50 states. To do that, you need more money.
You then go to a bank and tell them you want to expand your business. The bank will estimate how much your shoe company is worth, say $1 million. After that, your company is divided into fractional pieces, let’s say 1 million pieces, each piece equal to $1. You can choose to own, say, half of your company, which is 500,000 pieces, or $500,000. The rest of your company will then be sold to other people interested in your company.
The money you got from those people, $500,000, can then be used to open shoe stores across the country. If you make more money, your company will worth more, and more people will want to buy a piece of your company. But now your company is worth more, so each piece is more expensive. Instead of $1, it can jump to $2, which means your company is now worth twice as much, or $2 million.
I agree with the saying that “writing is thinking.” Writing about the process of an IPO forced me to rethink about the IPO, because I realized that even though I have read so many articles about it and watched so many videos on it, I’m still unable to just come up with the whole process naturally. I noticed that I had to take pauses frequently to rewind the details.
Also, writing about this topic helped me discover the blanks in my knowledge regarding to an IPO. I know that a business owner needs to consult with a bank to start an IPO, but my knowledge of the whereabouts of this consultation is vague. It turns out that I have very little clue about what banks take into account when they calculate the worth of a company.
Also, I find myself often questioning the steps in my explanation. For example, “why should you trust the bank to make a fair estimation of the value of the company?” or “what kind of a person will have an interest in the company?” I imagine it is fair for a ten-year-old to ask these types of questions, but for the sake of condensing, I chose to leave commentaries on these questions out. I also left out volatility aspect of stocks. I didn’t mention how stocks can just go up or down randomly during the day because I wanted to keep it simple.
The fact that I had to condense what was at first, a 450 word explanation, to something around 250 words was a challenge for me. At the end, this practice helped me focus on the essential parts of my topic, while weeding out information that my explanation can have without.