WHAT IS IPO?

 

IPO definition

IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. A private company that has a handful of shareholders shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.

How Does a Company Offer an IPO?

A company before it becomes public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with SEC. SEC scrutinizes the disclosed information and if found right, it allows a date to announce the IPO.

Why Does a Company Offer an IPO?

1. Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc
2. Trading stocks in the open market mean increased liquidity. It opens door to employee stock ownership plans like stock options and other compensation plans, which attracts the talents in the cream layer
3. A company going public means that the brand has gained enough success to get its name flashed in the stock exchanges. It is a matter of credibility and pride to any company
4. In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal

Should You Invest in an IPO?

Deciding whether to put your money into an IPO of a relatively new company is indeed tricky. Being a skeptic is a positive attitude to have in the STOCK MARKET

Background checks

The Company obviously does not have enough historical data to back your decision, because it is just going public now. The red herring is the data on the IPO details which is provided in the prospectus, you need to scrutinize it. Know about the fund management team and their plans for IPO generated fund utilization.

Things you should know before investing

1. If you have bought an IPO for the company, you are exposed to the fortunes of that company. You bear a direct impact on its success and loss
2. It is this asset of your portfolio which has the highest potential to reward the returns. On the flip side, it can sink your investment without a sign. Remember stocks are subjected to the volatility of the markets
3. You should know that a company which offers its shares to the public is not indebted to reimburse the capital to the public investors
4. You should weigh up your potential risks and rewards before investing in an IPO. If you are a novice, read up an account from an expert o If still in doubt, talk to your personal financial advisor