1.1. Stock prices after an iPO are often quite volatile. Why? Automobile production is, as we noted in Chapter 9, subject to economies of scale. Becoming a new car manufacturer requires considerable capital, well beyond what most individuals can put together. In the summer of 2010, Tesla Motors, a new electric car manufacturer, turned to the public to seek capital.

How did Tesla do this? Tesla decided to become a public company, with shares offered to the public on a stock exchange. The process of doing this is called an initial public offering (IPO). Tesla initially offered the public 13.3 million shares, each for a price of $17, for a total increase in capital for the firm of $226 million. In mounting its IPO, Tesla, like most other firms, relied on investment banks to help figure out the right price and manage the sales. In Tesla’s case, a number of firms were involved, including Goldman Sachs, J. P. Morgan, and Morgan Stanley. Managing IPOs is one of the functions of investment banks, as they help move capital from households to entrepreneurs with new ideas.