An initial public offering (IPO) is when a private company becomes a public company by selling its shares on the public stock exchange. Shares are then available for purchase by the general public.
It’s a time when a private company ceases to be private and now the company is open to the public.
Why Do Companies Go Public
Many people know that offering public shares allow a company to raise money from public investors.
But foremost, IPOs are opportunities for early investors to cash out their shares in the company for a profit.
Think of the show Shark Tank. Early investors cash out for profit so that they can invest in the next new venture or start up.
Also, going public offers a lot of publicity. Being a public company can offer better terms from lenders.
Downside To An IPO
Although going public is a great way to raise capital, businesses are now open to public scrutiny and satisfy shareholder expectations.
Businesses must provide disclosure; companies must file quarterly and annual financial reports.
Here are a few key terms that you’ll need to know when it comes to an IPO.
- Capital – The capital of a business is the money it has available to pay for its day to day operations and fund its future growth.
- Underwriting – IPO underwriting is the process through which an individual or institution work as an intermediary between the company seeking to go public and investors. Underwriters work to determine the initial offering price of a security.
How To Buy An IPO Stock
First you’ll need to find a broker that handles IPOs. Brokers like Robinhood, Fidelity and Charles Schwab may offer access to IPOs.
As always there’s the old way of gaining access to IPOs by knowing someone at a company or investment bank.
Brokerages like Robinhood are trying to help assist retail investors by offering early access to IPOs by giving customers the opportunity to purchase shares at a lower price.
Investing in IPOs carry risk. Taking a chance that the stock price will go up is extremely risky. There have been IPOs where the stock price dropped dramatically, so proceed with caution.
We are not financial advisors. We are financial friends. Always seek the advice of a professional before deciding to invest.