Stocks: IPOs

Initial Public Offerings, or IPOs, are a bit like a corporate version of a coming-out party. Depending on the company's prospects for growth, there may be many suitors eager to take part in the bash.

IPOs occur when a company first issues stock to the public. Back in the late 90's, the IPO market was booming as investors big and small scrambled to get a piece of the latest hot technology company that came to market. But with that exuberant buying could cause the stock price to pop on the first day of trading. But that first-day "pop" generally does not last very long so you could see the stock price retreat in the days and weeks following the IPO. So buyer beware: Fortunes can be gained and lost fairly quickly in the world of IPOs.

IPOs may come from established companies that have, for one reason or another, long been closely held by a few large investors. Goldman Sachs (GS:NYSE), which went public in the spring of 1999, is such an example. Initial offerings may also come from an operation within a larger company, with the parent company eager to open the division to the markets and unlock its shareholder value. An example of this is when Freescale Semiconductor (FSL:NYSE) )was spun off from Motorola (MOT:NYSE) in 2004.

But most often, IPOs are from relatively new companies looking to tap the public market to fund their expansion plans. Typically, a company begins as a start-up with venture capital funding -- private-sector money from well-heeled firms or individuals who make it their business to invest in early-stage companies.

If the company determines that stock-market demand for its business is strong enough, it will hire investment banks to take it public. The investment banks become the underwriters of the deal: They buy the shares from the company and sell them to the public at a preset price. If an IPO goes well, the stock rises above its offer price on its first day of trading. If a company decides down the road that it needs more money, it can have a secondary offering. Google's (GOOG:Nasdaq) successful 2004 IPO sidestepped this traditional route by using a Dutch auction, where investors bid on the shares in an open auction vs. having an investment banking divvy them out to clients, a practice that lent itself to abuse and unfair distribution of precious IPO shares.

Straight Talk on IPOs

IPOs have long been a hot but volatile facet of the market, and that's especially true now that smaller investors have been getting into the IPO game. Before you rush into an IPO to find that you bought at the top, you need to know the facts. For starters, here are some choice articles from TheStreet.com's staff that offer evergreen advice on a market that's anything but evergreen:

IPOs for Financial Fashionistas

Cylinders Firing on IPO Machine

How to Misprice Your IPO

Dutch Auctions and Their Fans

No Bubble in the Offerings