- An IPO (Initial Public Offering) is when companies sell their stock for the first time to the public.
- A company uses an underwriter to determine the best price at which to sell their shares.
- IPOs let companies raise a lot of money they don’t have to pay back.
What does “going public” mean?
An initial public offering, known as an IPO, is when company stock is sold for the very first time to the general public.
This is the same day the company gets “listed” on a stock exchange.
From this day forward, it’s no longer a small circle of company founders who own the business. It now also belongs to the public.
Who determines the price?
The company hires an underwriter. An underwriter’s job is to get all those initial shares out the door. To do that, they can either analyze the company and slap a price on it (“fixed pricing”), or they can call around to the biggest investors in the country and gauge the demand (“book building”).
Once the shares are on the open market, though, their value is determined only by market sentiment, which is the way investors feel about the company.
Why do companies go public?
Most importantly, to raise money without asking a bank for it. See, the money that a company gets from an IPO never needs to be paid back.
The company can use that money to grow operations, buy new equipment or even acquire other companies.
Original shareholders also like the idea of spreading the risk around. After going public, the owners of a company can cash in some profits while holding onto just a percentage of the company.
Thank you for reading and hope you learned something new.
In case you want to learn more things about investment check more articles from our Investment Academy.