Initial Public Offering (IPO)
Definition of 'Initial Public Offering (IPO)'
Also known as a public offering, an IPO (initial public offering) is the flagship opportunity for an emerging or new, privately held company to offer stock to the public investment community.
TheStreet Explains ‘Initial Public Offering (IPO)’
In addition to an IPO being offered by a new private company, a privately held company that is interested in becoming a publicly traded organization may also issue an IPO. Privately held companies typically have less shareholders than public and usually the owners of the company don’t make corporate information readily or widely available unless an inquiry is made. Quite the contrary, public companies have a smattering of shareholders, along with a board of directors who must report financial information on a quarterly basis. Public company stock is traded on the open market, allowing for anyone to purchase stock in the company.
A capital investment in an IPO means the investor is entering an uncertain world. Because the company is usually so young or new, making solid predictions on the stock’s direction is nearly impossible.
For a privately held companies, several advantages exist when offering a public IPO. Some benefits include having inexpensive access to capital, expanding the equity base and generated a multitude of financing opportunities. The downsides are the mounting legal, accounting and marketing costs, risk that funding may not be raised and a loss of control.
For example, Sarah’s dance store has been doing very well but she is short on capital to open more stores in an emerging market. She considers going to a bank for a commercial loan, which would allow her to open a new location, but that means she would have to take on more debt. Since Sarah is already paying on a commercial loan, taking out another loan does not sound like a great business strategy. Instead of going the loan route, she decides to sell shares of her business to the public in an effort to raise enough money to expand to the new market.
Sarah heads to an investment bank in order to set up the IPO. The investment bank values Sarah’s dance store at $300,000 and splits it into 50,000 shares at $4 per share. The bank decides to sell 25,000 shares of the stock to the public and 25,000 shares remain privately held. Sarah ends up making $175,000 from the investors, while at the same time being able to retain 50% of ownership in her company. In the end, Sarah opens the new location, she makes more revenue and satisfies a large group of clients who had been waiting for her new location to open, and Sarah’s shareholders make money.
Terms Related to 'Initial Public Offering (IPO)':
A firm that participates in underwriting securities, such as stocks...
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