Money Tips: What Is Ipo?

Initial public offering (IPO) is a company's first sale of stock to the public. Once an IPO is made a company ceases to be privately held and becomes publicly held.

Initial public offering (IPO) is a company's first sale of stock to the public. Once an IPO is made a company ceases to be privately held and becomes publicly held. When doing an initial public offering a company offers its newly issued shares to the general public. This is done with the help of an underwriter, i.e. a stockbroker firm which handles the distribution of shares to the public. Effectively, the underwriter subscribes (underwrites) for the shares and then sells them to his clients (investors). After the initial public offering, the shares will then be traded on a stock exchange. Entrepreneurs and Venture capitalists sometimes call it "cashing in". Up until a company is public, it is private and operates away from the public eye. When a company plans to go public apart from getting its shares underwritten it files the IPO with the Securities and Exchange Commission. The SEC maintains a publicly available, searchable database on IPO and other corporate information that is required to be filed with the SEC. The database is called EDGAR (for: Electronic Data Gathering, Analysis and Retrieval). Once the proper forms are filed and proper requirements are met, the private company agrees to offer a percentage of its company to the public in the form of stock, and sets an initial sale price for those stocks.

At this point it would be good to define stock. Stock is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. The goal of an IPO is to raise a specific amount of money, through the issue of these stocks, to meet the business objective, get the initial stockholders wealth and take the business to the next level. However, "going public", places stringent reporting requirements on the company.

In United States, an IPO (initial public offering) is a first and one- time only sale of publicly tradable stock in a company that has been privately owned previously. The IPO procedure is specified by the US Securities and Exchange Commission (SEC). As stated earlier the initial public offerings are generally managed by professionals (underwriters) who specialize in handling IPOs and have experience in determining what the likely IPO offering price should be. When all the shares of an IPO have been sold, then the stock is tradable through stock exchanges or specialist that trade in the stock and the stock prices may go up or down.

IPO can further be divided into a traditional IPO and auction based IPO. Traditional IPOs are those where the initial shares are first offered to the large institutional investors, including the institutional banking firms and investment houses that are offered a certain block of stocks, who then offer these to their high rated investors. An important aspect of these traditional IPOs which are offered through the investment houses is that there are set limits to the amount of stocks offered and most of these "A" stocks are tough to get hold of unless someone is a regular player in the market.

An auction based IPO on the other hand is the one, which is offered directly to the public from the company. However, in this case the stocks are not as regulated for proper growth and valuation formula as the traditional one as there are no professional managers of the stocks. Here, it is the buyer who determines the stock/company's value and not the market as monitored by its peers and community oversight boards such as the Banking community as a whole. Thus, by opening up the auction, the prices of the stock can soar astronomically, making it difficult for the average buyer to participate in the IPO.

Initial Public Offering or IPO as it is commonly called is an area which the inexperienced investor should explore with caution. It is advisable to have a long talk with the investment advisor before getting into the IPO.

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