What is an Initial Public Offering (IPO)?

by Investing School on January 7, 2011

An IPO is an initial public offering. It is also called an “offering” or “flotation.” An IPO happens when a company – also referred to as an issuer – issues common stock or shares to the public for distribution for the first time. This usually happens with smaller companies or startups that are looking for capital to grow their business. It is also done by larger and privately owned companies who are seeking to become publicly traded.

When seeking to do an IPO, the company may look for the help of an underwriting firm. The firm will be able to help determine what kind of security to issue, for instance common or preferred. They will also assist by helping to establish the best offering price and determining when is the best time to bring the offer to the market.

An initial public offering offers some risk. For someone who is an individual investor, it is very difficult to predict whether or not the stock or shares that you may be interested in will do well on the first day of trading, or even in the future, because there is little to no historical data from which to base predictions. Additionally, IPOs go through a growing period, as most new companies will. This also contributes to the uncertainty of their value.

When a company puts its shares up on public exchange, it will probably also seek to issue new shares at the very same moment. The money that is received for the newly issued shares will go straight to the company.

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