New to IPOs? Here’s what you need to understand

on Dec 12, 2019
Listen
  • An IPO is a process used by a private company to issue shares to public investors before trading on an exchange.
  • When a private company attains a certain level of maturity, it issues an IPO through a public advertisement.
  • An IPO allows public investors to invest in a soon-to-be-listed company.

Follow Invezz on Telegram, Twitter, and Google News for instant updates >

Initial Public Offering (IPO) is the process of issuing shares of
a private company to the public for subscription. An IPO enables companies to
raise money from public investors, and existing private investors realise gains
(or losses) on their share values once the company transitions into a public
one.

Are you looking for signals & alerts from pro-traders? Sign-up to Invezz Signals™ for FREE. Takes 2 mins.

When a company starts the process of going public, it will appoint
one or more underwriters to act on its behalf during
the IPO process. The underwriters will select the exchange for issuing and
trading the shares. While the shares can be issued on exchange X, they can also
be traded on exchange Y.

For decades now, companies have been issuing IPOs to raise funds
for expansion, debt settlement, among other things. The phrase Initial Public
Offering has been a buzzword among investors and Wall Street for ages now.

 The modern-day IPO is
credited to the Dutch, having issued shares of the Dutch East India Company to the general public
more than four centuries ago. Since then, IPOs have been issued by hundreds of companies
to the general public in exchange for stakes in the issuing entities.

Before issuing an IPO, most companies maintain a lean team of
investors. However, that changes when the entity goes public, attracting hundreds,
thousands or millions of investors.

When a company operates privately to a point when it matures and is
ready to admit more shareholders, it issues an IPO through a public advertisement.
The company creates hype around its listing to attract as many investors as
possible before its IPO hits the market.

Most companies will want to
go public when they attain a particular private valuation, typically $1 billion
or otherwise known as the unicorn status.
However, there are no hard rules as to when a company should go public; the
most important metrics include strong fundamentals and proven
profitability potential. Also, the ability to list will depend on the market
competition and the company’s ability to meet the listing requirements.

Companies that
IPO achieve higher growth levels since more resources are admitted,
accountability is increased, and transparency becomes paramount.

Through
underwriting due diligence, the company’s shares are finally priced, and upon
listing, the private shares of the company are priced using the market price. Underwriting
of shares can also include special provisions for private to public share
ownership.

Private investors
can take advantage and cash in when a company goes public.

Meanwhile, the stock
markets allow public investors to participate in new IPOs while the issuing companies
raise more capital.

Stock Market