What Is an IPO?
An Initial Public Offering (IPO) is a company’s first public offering of stock. In an IPO, investment banks buy a private company’s shares and then offer them to the public at a certain offering price. This allows the company to raise capital from public investors. As the stock is traded, the market price may fluctuate from the offering price. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. When sold, shares may be worth more or less than their original cost.
The IPO process is the initial offering of shares of a private company to the public market. An IPO allows private companies to raise money from public investors before transitioning to a publicly owned company..
How Does an IPO Work?
Before a company has an IPO, it is considered private. A pre-IPO private company likely has grown with a relatively small number of shareholders including early investors. These investors are likely the founders, family and friends, or professional investors such as venture capitalists or angel investors. An IPO enables companies to access a wider pool of investors, potentially giving them the ability to raise a lot more money.
When a company decides it is mature enough for the public market, it will begin to advertise interest in going public. Once the price per share is determined through underwriting due diligence and the company goes public, all current investors’ shares convert to public ownership and are worth the public trading price.
Is Investing in an IPO a Good Idea?
Investing in an initial public offering (IPO) comes with certain risks that may be avoided by holding off on your investment a bit longer.
Since IPOs don’t have a proven track record in the public domain, it is difficult to determine if the company was properly valued. IPO investments are also highly volatile while the company finds its footing in the public market.
There is generally a lot of media attention surrounding an IPO and the company reaching the public market, and investment decisions shouldn’t be made solely based on this information.