An initial public offering is the first-time issuance of shares to the stock market by a newly publicly traded company. IPOs can be used by smaller, growth companies in need of raising capital for expansion or large private companies seeking to become public. When an incorporated firm decides to become a publicly traded company, they typically enlist the help of an investment bank to underwrite their proposed IPO. The investment bank thereby assumes the risk of selling the shares of stock in an initial public offering, and determines the quantity of shares to be released and their pricing.
IPO Companies
Typically, the candidates that undergo the IPO process are considered growth companies in their market. These companies intend to expand their operations, and finance it through an initial public offering. By becoming a publicly traded company, the firm gains access to the capital that investors intend to use by buying the company’s shares on the stock market. However, companies that file for an IPO also have to take on extra costs of being a publicly traded company. This includes complying with the Securities and Exchange Commission regulations, stricter accounting rules, and increased investor relations efforts.
Investing in IPOs
It is generally understood that buying shares of a company in an initial public offering is riskier than buying shares of an established publicly traded company. With an existing publicly traded company, investors expect that the stock market value is already priced into its shares. IPO stocks sold in the primary market, however, haven’t yet had this pricing correction.
IPO Underwriters
When an incorporated firm decides to become a publicly traded company, they typically enlist the help of an investment bank to underwrite their proposed initial public offering. The investment bank thereby assumes the risk of selling the shares of stock in an initial public offering, and determines the quantity of shares to be released and their pricing.
