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Initial Public Offerings - IPO

Additional Resources

  1. The Timing Of Initial Public Offerings [finance.wharton.upenn.edu]
  2. Speculative Initial Public Offerings [econjournal.sites.yale.edu]
  3. Allocation Of Initial Public Offerings And Flipping ... [schwert.ssb.rochester.edu]
  4. The Pricing Of Initial Public Offerings: A Dynamic Model With ... [www2.bc.edu]
  5. Short Selling In Initial Public Offerings [cbe.lehigh.edu]
  6. Initial Public Offerings: Going By The Book [gates.comm.virginia.edu]

Definition

Initial public offering or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time. Through this process, a privately held company transforms into a public company. Initial public offerings are mostly used by companies to raise the expansion of capital, possibly to monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.

Initial Public Offerings - IPO

IPO or Initial Public Offering refers to the first stock sale made by a private organization to the public. This move is typically used by small companies that require funds in order to expand operations, but it is not uncommon for larger companies either especially those that wish to reach the public.

The process is simple enough. In an IPO, the issuer gets aid from an underwriting company in determining whether it should issue a preferred or a common security along with the best price and the time it should be introduced into the market.

Issuing shares via IPO is one of the main reasons the stock market exists. It allows companies to increase capital so that they can expand operations, allow investors to cash out or create common stock to get rivals. They can also sell some of the shares later if they wish to. This is known as the primary market and it occurs when an investor purchases stock straight from a company.

However, a secondary market is more common and it occurs when several investors make trades between themselves using shares they acquired from a company.

How a Company goes Public

Getting a company through to its Initial Public Offering takes a lot of time and money. Besides overcoming regulations, the company has to contend with public scrutiny along with the oversight of the SEC or Securities and Exchange Commission.

If you wish to take your company public then it would be best to hire an underwriter to help you through the process along with services from an investment banking company that can take care of most of the grunt work. The result will be a preliminary prospectus which you can present to investors and the SEC.

This is called a 'red herring' in the stock market and this will be your final prospectus or the final legal document that can facilitate the IPO process. One of the most important documents in this is the S-1 form which is basically the legal registration statement. A well made prospectus will outline what your company does, why it is issuing shares via an Initial Public Offering and the type of ownership on offer to investors in clear terms.