What Is an Initial Public Offering (IPO)?

What Is an Initial Public Offering (IPO)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

An Initial Public Offering (IPO) is the process a private company goes through to become publicly traded on a stock exchange. It’s the first time a company’s shares are offered for purchase to the general public. Before an IPO, a company is considered private, with a smaller group of early investors who supplied the initial capital. In an IPO, the company is opening up its ownership to public investors in a bid to raise additional capital for expansion, pay down debts or for other corporate purposes.

Related Questions

1. Why might a company choose to have an IPO?

A company might choose to have an IPO to raise more money for growth and expansion. It also gives a company more visibility and credibility in the marketplace. Furthermore, having an IPO can provide an exit strategy for early investors and share liquidity for employees holding company stock.

2. What are the risks involved in an IPO?

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IPOs come with significant risks, including the financial cost, demands of complying with regulations, and the pressure to maintain increased growth and the stock price. There’s also the risk that the company is not received well by the market, so the stock could lose value.

3. How does a company start the IPO process?

The process starts with hiring a team of advisors, which typically includes an investment bank, lawyers, and accountants. The company will then prepare a registration statement to file with the Securities and Exchange Commission, detailing its financial condition, business model, and management structure among other things. It also includes a prospectus, a formal legal document that provides details about the investment offering for public scrutiny.

4. What role does the underwriter play in an IPO?

The underwriting bank or banks play a huge role in an IPO. They’re involved in all major areas of the offering, including determining the offer price, helping with regulatory filings, and promoting the shares to investors.

5. How is the initial price of the IPO determined?

The initial price of the IPO is determined by investment bankers hired by the IPO company. They take into account various factors such as company’s financials, potential for future growth, market conditions, and investor sentiment.