An initial public offering (IPO) is a means of raising capital. It’s also the process by which a private company sells shares to the general public. An IPO brings in new investors who are excited about buying stock in the company. This offers an opportunity to sell shares at a higher price than what you originally paid for them and make money from it as well. An initial public offering is very different from a secondary market offering. In an IPO, you’re selling equity for the first time directly to the general public on a stock exchange.
But suppose you already own non-voting common stock in your business. In that case, it makes sense for you to sell some or all of those shares through a secondary market offering to raise capital from other investors who want access to your company’s existing shareholders without paying full price.
What is an IPO?
A company going public is selling shares to the public for the first time. This is an uncommon event, but it does happen. Usually, when a company goes public, it has been around for a few years and has demonstrated profitability. When a company goes public, it has two goals. The first is to raise capital. That is why the shares are sold to the general public. People who don’t own shares don’t have a vested interest in the company.
They just want to make a profit by buying shares at a higher price than they paid for them. The second goal of an IPO is to create hype around the company. It’s a marketing strategy — the company wants to get the public excited about investing in their stock. A successful IPO can drive a massive amount of hype and interest in a company.
How does an IPO work?
Let’s say you own a company called “Smith Co., Inc.” You want to raise capital and go public, so you decide to do an IPO. When the IPO is complete, you’ll sell shares of your company on a public stock exchange. This is different from selling shares privately to family and friends. When the offering is complete, you’ll issue new shares of stock to the general public. The company will now have ownership of both the stock and the shares of stock owned by the public.
Things to consider before doing an IPO
Just like any investment venture, there are things you need to study and consider before going into an IPO. Here are a few things:
- How well is the company doing?
It is important to make sure that the company you are trying to get connected to is doing fine financially and in all other aspects. The last thing you want us to get involved with is a company that lacks credibility and is unstable.
- How much money do they plan to raise?
There are figures you need to know and understand concerning the company you intend to work with. This will help you determine your goals, limits, and advantages.
- What are the risks of an IPO?
IPO has a couple of risks, all of which need to be known and understood all the risks involved in investing in an IPO.
How do I invest in an IPO?
If you see an IPO pop up on your newsfeed, go to the stock exchange website and search for the company name. You can engage in a conversation with other investors and analysts about the company. If you like what you see and hear, you can buy some shares. What you’re doing is buying a small amount of stock in the company. When the IPO is complete, the company will issue a new type of security called a stock.
You’re now the owner of this stock. You can sell this stock to other people. If the price of the stock goes up, it’s like a cash windfall for you. If the price of the stock stays the same, you just keep the same amount of cash. This is how most people invest in IPOs.
Can anyone buy IPO stocks?
Yes, anyone can buy IPO stocks once the offering is complete. The price of the stock will be set by the public when the IPO goes live. You can’t buy the stock ahead of time or use a discount or a special offer. You just buy it when the stock hits the public market. You’re limited to how many stocks you can buy, depending on the offering size. The larger the offering, the more stocks you can buy. Your broker will let you know how many IPO stocks you’re able to buy and when to buy them.
What are the downsides and risks of an IPO?
There are a few downsides and risks of doing an IPO. One risk is that the initial demand for the stock may not be what the company expects, so they’ll end up having to buy more shares to maintain their target price. The other risk is that the company doesn’t do as well as they expected, and the stock price declines, which could diminish your investment.
Pros of An IPO
IPO has a whole lot of advantages, some of which include:
- Better access to capital
- increased shareholder value
- increased public awareness of the company
- free marketing for the company, more shares traded, a more liquid market, more liquidity for investors
- more options and liquidity for investors, a higher price of the stock
- More liquidity for shareholders if the price drops, new investors have an incentive to buy the stock.
Cons
- New risk
- new risk
Which companies do IPOs?
The most popular companies to go public are technology companies because they’re often young and growing quickly. Other popular categories for IPOs include consumer products companies, consumer services companies, and biotech companies.
Conclusion
IPOs make a lot of sense for growing, profitable companies that have demonstrated a good track record of profitability and are ready to scale their operations through the distribution of equity to a larger audience. That said, not every company that goes public is a great investment. Investors must understand the inherent risks and rewards of investing in an IPO.
If you’re interested in IPOs, start watching the news, reading business blogs, and talking to your friends. These are all great ways to stay up-to-date on what’s happening in the world of IPOs.