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

Damian Wood
  • December 12th 2019, 19:30
  • 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.

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.

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.

About the author

Damian Wood
Damian Wood
As an experienced trader, I work for myself managing my own small portfolio and also contributing on several investment news sites. I mix my passion for the industry and journalism to bring my readers informative and trustworthy articles.

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