Business, Legal & Accounting Glossary
An initial public offering (IPO) is a company’s first sale of stock to the public.
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors.
IPO is an acronym for Initial Public Offering. An IPO is the first sale of shares in a company to the public. Once an IPO occurs, a company will be listed on a major stock exchange, and shares will begin to trade immediately. The IPO market goes in cycles depending upon the appetite of investors for new issues.
Often the share price will increase quickly after an IPO, so purchasing shares at the IPO price may be a coveted investment opportunity. When management says it plans to take a company public, it means that an eventual IPO is planned. A successful IPO can raise a large amount of capital for the newly public company and create substantial wealth for insiders who owned shares prior to the IPO.
Typically, an IPO involves the stock from a young and oftentimes little-known, if not obscure, company. But occasionally, well-known and well-established firms do “go public.” Companies go public in order to raise money. In so doing, the company helps itself: it increases its financial base, liquidity, prestige, and ability to attract management and make acquisitions. Or, it could be that an established company is spinning off subsidiaries to “unlock hidden value.”
In unlocking hidden value, companies go public or do a partial spinoff of a subsidiary to establish fair market value for the asset. Fair market value is useful in a variety of tax and tax planning issues. The value established in public trading may also increase the value of share to investors increasing the value of future stock offerings. Finally, in small start-ups, employees and investors are often rewarded with restricted shares of stock. The IPO allows early investors to take profits and diversify their holdings.
The IPO is usually arranged through an investment bank by the company’s CFO.
Some companies, on the other hand, choose to stay private so they don’t have to share profits, be accountable to shareholders, relinquish control, manage quarterly sales/earnings, worry about keeping stock prices high, or disclose company secrets.
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This glossary post was last updated: 6th August, 2021 | 1 Views.