Getting to Know IPOs

Thursday's initial public offering of Chipotle Mexican Grill (CMG) was a sizzler, with the shares doubling on their first day of trading. With gains like that, it's no surprise that many of our readers have been asking about IPOs and how the process works. Here's our best explanation.

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.

The offerings occur when a company first issues stock to the public. They may come from established companies that have, for one reason or another, long been closely held by a few large investors. Goldman Sachs(GS), which went public in the spring of 1999, is such an example. The investment bank was founded in the mid-1800s and remained a private partnership for over 100 years before opening itself up to public ownership.

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.

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.

Such was the case with Chipotle, which was spun off from McDonald's(MCD). The 13-year-old burrito and taco purveyor is much smaller than its burger-giant parent, with about 480 stores and $471 million in revenue in 2004.