Obviously, with this large chunk of cash coming into a company, there is the possibility for fraud. To counter this, the federal government created the Securities and Exchange Commission, or the SEC.
In order to go public and do an IPO, companies must have the SEC's approval. They obtain that approval by writing something called an S-1 document. In most cases the S-1 document is a full book describing exactly what the company is doing and why. Here, as an example, is Google's S-1 filing: Google, Inc. S-1 on 4/29/2004.
The SEC reads the S-1 document and then usually goes back and forth with the company to adjust it. Then the SEC either approves or denies it.
The next step is to get shareholder approval. The company is a private company prior to the IPO, and it has private investors.Those investors have to vote on whether or not to create the IPO, and they use the S-1 document to gather the information they need to vote. If the existing shareholders approve the IPO, then the company can continue the process -- namely, securing investors.
Picking an Exchange
While it is filing its S-1 and getting shareholder approval, the company chooses the exchange it will electronically trade on. This is an important decision for a number of reasons. Many high-tech companies -- like Intel, Microsoft and Apple -- have traditionally chosen the NASDAQ stock market. Today, the type of company choosing the NASDAQ is much broader because the exchange has been so successful. Most would not consider Starbucks coffee to be "high-tech" per se, but it is listed on the NASDAQ nonetheless.
In picking its exchange, the company also picks its trading symbol. Microsoft trades under MSFT. Starbucks is SBUX. A new company picks its symbol often as an abbreviation of its name, but it sometimes gets creative, too. For example, the cell phone company Brightpoint uses the symbol CELL.
The company pays NASDAQ about $160,000 per year to be listed on its exchange.