What is an IPO?
- Real Vision
- March 22, 2022
- 3:56 PM
If you’re new to investing, you’ve probably heard the term IPO, which stands for “initial public offering.” The term refers to privately owned companies that are issuing stock to the public for the first time. Companies often wait years to go public as they accumulate value. Once the IPO is initiated, you can start buying stock in the company just like any other investor. Learn more about IPOs and how they work in the market today.
What Is an IPO?
An IPO is the process of a privately owned company offering its shares to the public in the form of stock investments. Before an IPO, a company is considered private. The company’s shareholders usually consist of the founders, family, friends, and other initial investors, like venture capitalists and angel investors. Once the company reaches a certain value, usually around $1 billion, it will start the process of going public. This threshold is often known as “unicorn” status.
Once the IPO is live, the company will need to report to the Securities and Exchange Commission (SEC) just like every other publicly traded company. The company’s overall value and the stock’s current trading price will be made public. As an investor, you can then buy shares of the company. Many of the original investors will sell their stock to public investors, while others may hold onto their shares until the stock price increases.
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What Does an IPO Signal?
A company’s IPO is the first time the company is offering its shares to public investors. It is like a debut of sorts. The company may be growing in its respective industry or dominating new sectors of the market. Companies will often market the upcoming IPO to investors to generate buzz. Most investors will have heard of the company beforehand. The IPO gives them a chance to cash in on the company’s success as it continues to grow.
Why Do Companies Issue IPOs?
There are many reasons for a company to go public once it has reached a certain level of success. The founders likely invested lots of their own money into the company. The same may be true of their family and friends. Venture capitalists and other private investors will also put money into new businesses to help them get off the ground.
Investors may have to wait years to get their money back as the company continues to grow. In many ways, the IPO is a way for the initial investors to get their money back by selling their existing shares to public investors. Depending on the nature of the company, the IPO may generate billions of dollars in capital. The IPO may even come with a share premium for the original investors, which means they will earn a certain percentage of all stocks sold to the public.
Going public also helps companies increase transparency. Having an IPO exposes the company to additional regulation and oversight. It will have to regularly report its earnings to the public, which can help investors generate confidence in the company. The company can also use this information to demonstrate profitability when applying for a loan.
As public investors buy the company’s stock, the value of its shareholder equity will increase. The price of the stock depends on how much the company is worth and how many shares are being sold.
How Does an IPO Work?
The IPO process can be extremely involved. It consists of 2 parts.
The first stage is when the company begins researching a potential IPO. They may reach out to underwriters and solicit private bids to get a sense of how much their shares will be worth. Other companies will simply announce their intention to go public to generate interest among investors.
The company will also need to decide how it intends to issue stock to the public. Executives will meet with various underwriters as they pitch their services. They will present various options in terms of what types of securities to issue, setting the initial offering price, number of shares, and estimated time frame of the offering.
Once the company chooses an underwriter and proposal, they will agree to the terms of the IPO. The company will then assemble a team of lawyers, accountants, and those familiar with the latest SEC regulations and requirements. This team will need to provide documentation for the IPO, including the expected date of the filing.
Now that the terms of the IPO are complete, the company can begin marketing the IPO to the public. The team will need to develop marketing materials and establish a final price for the stock. The terms may be changed continuously throughout this process.
The company will also need to form a board of directors if it hasn’t done so already.
What Happens When a Company Goes Public?
On the day of the IPO, the company’s shares will be made public. The original investors will begin receiving capital, and the value of the company’s shareholder value will be recorded.
Once the IPO is complete, the company may implement a quiet period as trading settles. Underwriters and investors may also have a chance to buy additional shares of the company based on the results of the offering.
How to Invest in an IPO
You can invest in an IPO just like you would any other publicly traded company. If you buy the stock when it first hits the market, you may be able to make a profit by selling this stock later on for a higher price.
If you’re ready to start investing in IPOs, it’s best to do your research ahead of time. Start researching up-and-coming companies that have yet to go public. If the company seems like it is headed for success, get ready to invest on the day of the IPO. Consider how many shares you are willing to buy based on the initial price. Remember that just because a company is going public doesn’t mean it is destined for success. Do your research and proceed with caution when investing in new companies.