Initial Public Offering

An initial public offering (IPO) is a type of public offering in which shares of a company are sold to institutional or retail investors.

Also characterized as a stock market launch, IPOs are underwritten by one or more investment banks.

These banks are also responsible for arranging for the shares to be listed on one or more stock exchanges. This entire process is known as going public, transitioning a privately held company into a publicly traded entity.

IPOs are popular mechanisms to help raise new equity capital for companies, or to monetize the investments of private shareholders.

This includes company founders or private equity investors.

In addition, IPOs also help facilitate trading of existing holdings or future capital raising by becoming publicly traded.

Understanding IPOs

The IPO itself is only the first step to a company going public. Afterwards, shares are then traded freely in the open market at what is known as the free float.

Stock exchanges then stipulate a minimum free float both in absolute terms, i.e. the total value as determined by the share price multiplied by the number of shares sold to the public and as a proportion of the total share capital.

IPO do offer a wide range of benefits for companies, however there are also significant costs involved.

This includes costs associated with the process such as banking and legal fees, as well as disclosing important and sometimes sensitive information.

Details of the proposed offering are disclosed to potential purchasers via a lengthy document known as a prospectus.

These documents inspired Initial Coin Offerings (ICOs), which became popular in 2018.

Most companies decide to underwrite an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter.

These underwriters provide several services, such as assisting with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale).