IPO (Initial Public Offering): For Dummies

  • Posted on January 02, 2020
  • IPO
  • By admin

“An initial public offering (IPO) is the process through which a privately held company issues shares of stock to the public for the first time. It is also known as ‘going public’, an IPO transforms a business from privately owned and operated entity into one that is owned by public stockholders.”

Through IPOs, companies offer the issuance of public ownership of its shares and in turn, raise capital from public investors. Privately run companies seeking to expand their business operations and raise funds usually ‘go public’ as a means of attracting potential investors and raising a target amount through an offering. Basically, an IPO provides companies access to capitalization from the public market. Going public offers a lot of benefits yet it comes with its limitations which include making significant changes in a company and ensuring transparency in important business decisions and financial transparency. The company is accountable to all its shareholders.

How does IPO work?

When a company newly launches, it is often regarded as a private company until it decides to go public and is officially listed on any stock exchange. Before a company can consider going public it ought to have a solid structure on ground with its goals properly set out especially if it is considering speedy expansion. Private companies also have investors, but its investors are “private investors” which are mostly made up of the founder, family, friends, and professional investors (venture capitalists). When the company decides to go public, it then becomes open to “public investors” who get to buy into the company through shares. Usually, the considerations involved with going public involves the maturity level of a company, and its ability to abide by the SEC regulations and remain committed to all its investors. The company's “IPO-worthiness” growth is dependent on its net worth which is an expected $1 billion, and the company’s potential to generate higher revenue in the coming years.

Is Investing in IPOs a Good Idea?

Compared to investing in already established companies, investing in IPO may be quite risky especially for inexperienced investors. The uncertainties attached to first-time public companies are what makes such investment risky. On the other hand, IPOs are more beneficial to the companies in the area of capitalization. At the beginning of the “going public” phase most companies are more concerned with building the company and expanding its business operations for the first few years after issuance before bringing in investment returns for its investors. IPO investment is ideal for long term investors and experienced investors. Most IPOs tend to underperform the market as their focus tends to be helping private investors cash out, monetize the founders’ stocks, pay off pre-IPO debts, and funding of ongoing losses. In as much as some investors see IPO investing as a dumb idea, many brokerage firms still support this feature. Brokerages like Schwab, TD Ameritrade, and Fidelity with a minimum investment of at least $100,000 while others like TD Ameritrade accept a minimum investment of $250,000. 

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