An initial public offering (IPO) is the process by which a privately held company issues shares on a public stock market for the first time.
What that means:
There often comes a time in a private company’s life when it wants to raise large sums of money, usually to pay back private investors who may want to cash out or fund growth (often both). The most common way to do this is through an IPO. Here, the owners sell their own company shares on a stock exchange and collect the proceeds, or the business issues new equity alongside the old. It’s usually a two-step process where investment companies or “underwriters” commit to buy all the newly issued stock at a set price before it starts trading, then sell the stock to the public over time. For the average person, an IPO presents a new investment opportunity. However, depending on the company, buying in soon after a listing can be risky. For one thing, there’s often excitement around these stocks, which means a lot of volatility from buying and selling. These companies may also be newer businesses that still have a long way to go before reaching their full potential. While an IPO does offer investors a chance to get in on the ground floor, it could be months, if not years, before the stock climbs higher, if it ever does. However, a listing does give potential investors a view into a business they otherwise wouldn’t have had. By law, the newly public company must publish quarterly financial statements and disclose other relevant information, usually for the first time. Make sure to peruse these documents, available on market regulators’ websites and the company’s own site, before buying. Some investors might find it prudent to wait for a while after the IPO to buy stock, by which time the business would have established a track record on the public markets.