how do companies decide the number of shares they want to sell when they do an IPO

Question

Like why does apple have 15,5b ish shares and Microsoft have 7,4b shares outstanding

In: Economics

Answer 1

Companies figure out what they think their company is worth, and then divide it into a number of shares that make the share price appropriate for people to buy.

If the share price is too high, investors don’t have a lot of wiggle room with how much to invest. Having $1000 shares makes it very hard for them to be traded. Similarly, having shares worth less than $1 can mean that there has to be a huge change in the valuation of your company for the share price to change at all due to rounding.

So let’s say your company is worth $122,650,000, and you want the shares to be worth about $50 each. You could do that with by issuing 2.453m shares, although you might make it a cleaner number and issue 2.5m shares, and your IPO price ends up being $49.06 instead.

Now once your company is out there, if your company value grows too much and your shares are individually priced too high for individual investors, you might do a stock split, where you say every share becomes 2 (or more) shares, splitting the original value across all the new shares. The total value of all the shares is unchanged, but now you can trade them in smaller units at smaller prices.

Apple didn’t originally issue 15.5b shares. They’ve had 5 stock splits, 3 2x splits, 1 4x split, and 1 7x split, meaning there are 224x more shares now than they originally started with. Also, Apple has more than 15.5b shares — that’s just the amount that are held by investors. There’s a number of shares that are held by the company as well, which they technically could resell if they needed an influx of cash.