Definition and Examples of an Initial Public Offering
An Initial Public Offering (IPO) is the process in which a private company offers shares of its stock to investors for the first time. When a company undergoes the IPO process, we often say that it is “going public.”
How an Initial Public Offering Works
In order for a company to go public, it must file a Form S-1 (among other forms) with the U.S. Securities and Exchange Commission (SEC) that outlines the details of the IPO process. It is a crucial document that investors should read when considering an investment in a new public company.
Terms of the Initial Public Offering and Shareholders
The Form S-1 specifies the terms of the company’s IPO, focusing particularly on the number of shares to be issued to the public.
History, Story, Current Status, and Risks
Companies use the S-1 form to sell potential investors on their public offering. As such, the company does a bit of dancing in the IPO prospectus – promoting itself and providing a candid assessment of the challenges it faces and what could go wrong. Most S-1 filings resemble Airbnb’s, which starts by looking at the company’s history and how it became a viable force in its industry. From there, it outlines the climate in which the company operates prior to its public offering, along with specific financial metrics.
How Will the Company Use the Proceeds from the Initial Public Offering?
The S-1 form also includes details about how the company plans to allocate shares to investors, as well as how it will use the capital it raises after going public. For example, part of Airbnb’s description outlines how it intends to use the proceeds from its IPO:
What Does an Initial Public Offering Mean for the Economy, Consumer, and Investor?
You may have heard the phrase “hot IPO market.” Generally, this means that investors in the public have welcomed companies going public well. This can lead other private companies to engage in an IPO. It may also indicate a potentially strong economy if a significant number of private companies are successful enough to increase investors’ appetite for risk.
Advantages and Disadvantages of Initial Public Offerings for Investors
Along with every benefit of investing in an IPO, there is a drawback for individual investors.
Tips for Investing in an Initial Public Offering
Your best bet is to consult with a financial advisor and to take a conservative approach when investing in an IPO. If you are fortunate enough to receive an allocation of shares at the IPO price, make sure to conduct thorough research and due diligence (such as carefully reading the form) before investing. Remember, the IPO can fall below the offering price after hitting the public market – its price won’t always go up.
If you plan to buy shares on the IPO day or shortly thereafter, treat your investment like any other investment. Ask yourself, do you believe in the company’s long-term growth prospects and the potential for the stock price to increase? Are you willing to face volatility? Are you confident enough in the company to buy more shares when you see the price take a significant dip?
Source: https://www.thebalancemoney.com/what-is-an-ipo-3305857
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