An IPO is the acronym for an Initial Public Offering. Such IPO’s represent the first opportunity for most investors to start buying shares of stock in the firm in question. Initial Public Offerings commonly generate a great deal of excitement, not only for the company involved but also for the members of the investing community.
Private companies decide to issue stock and become publicly traded companies for a few different reasons. The main two motivating factors revolve around the need to raise more capital, as well as the desire to permit the original business owners and investors to take profits on their time and investment that they originally put into starting up the company.
It is true that private companies are limited in the amount of capital that they are able to raise, since their ownership turns out to be restricted to certain organizations and individuals. Public companies have the advantages of allowing any investor to take a stake through buying stock shares on exchanges that are publicly traded. It is far easier for them to raise money as public companies.
Initial Public Offerings that go well translate to large amounts of cash for a company. They use this for future expansion and development. Those who began the company or who were initial investors typically make enormous gains at that time in compensation for their time and effort.
Initial Public Offerings take huge amounts of preliminary work. Great amounts of paper work have to be filled in and filed with the regulatory oversight groups. A prospectus has to be created for investors to study and consider. Advertising campaigns for the first shares that will be sold must be developed. On top of these tasks, the company has to continue its normal operations. Because of this, financial firms such as Morgan Stanley or Goldman Sachs are commonly engaged to perform these tasks on the company’s behalf. Such a firm is called the IPO underwriting company. With enormous sized IPO’s, these tasks could even be divided up between a few different IPO underwriting companies.
Contrary to what many people think, the majority of IPO’s typically do not do well initially. Besides this, a percentage of the companies will not make it, meaning that all of the investment in the IPO stock could be lost. Because of this, there is great risk and often lower rewards for sinking money into Initial Public Offerings than in traditional well established companies and stocks. Many investors buy into the enthusiasm and excitement that surrounds Initial Public Offerings. Another explanation for their euphoria may have to do with believing that there is something special in being among the first investors to acquire the next possible Apple, Coca Cola, or IBM. Whatever their reasoning proves to be, investors continue to love Initial Public Offerings and the somewhat long shot opportunities that they represent.
The term 'Initial Public Offering (IPO)' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.