Initial Public Offering (IPO)

Definition

Initial Public Offering (IPO) is the first stock sold by a private entity to the public. Initial Public Offerings are generally used by younger and small entities that are looking to raise or expand their capital. However, IPOs can also be offered by large private companies that wish to trade publicly.

In an Initial Public Offering, the issuer acquires the help of an underwriting entity, which offers help in terms of determining the security type that should be issued (preferred or common), the best price for offering and the appropriate time to release the IPO in the market.

Initial Public Offering is an investment that comes with a number of risks. For an investor, it is very difficult to make predictions with regard to how the stock will perform on the very first day of trading as well as in the future as not much data or information is available that could help the investor analyze the entity. Also, the Initial Public Offerings are mostly issued by entities that are undergoing a transitory growth phase.

It is usually not possible to purchase shares in a private entity. Investors can always approach the private entity owner regarding investing, but they are under no obligation to sell them anything. On the other hand, public entities, usually sell a portion of their company to the public and therefore they indulge in trading on the stock exchange. This is precisely why issuing an Initial Public Offering is also known as ‘going public’. Public entities have hundreds of shareholders and are subjected to stringent regulations and rules. They should appoint a board of directors and must also disclose financial results on a quarterly basis.

Benefits of IPO

A company that chooses to go public can raise a good amount of cash. In addition to this, trading publicly offers a plethora of financial options to the company owing to the enhanced scrutiny. Public entities can acquire a better rate when they resolve to issue debt.

If the demand for stock is on the rise, then the public entity can issue additional stock. Besides, it also becomes easier for the company to indulge in mergers & acquisitions as the stocks can be sold as part of the dealing.