What are Initial Public Offerings?

Mary McMahon
Mary McMahon

Initial public offerings are events at which a formerly private company first begins offering stock for sale to the public. Also known as “going public,” an initial public offering (IPO) is usually used to raise capital. The process is lengthy and can be quite expensive, so companies only embark on initial public offerings when they know that they are likely to generate substantial amounts of capital. In some cases, an IPO is eagerly anticipated by members of the public, while in other instances, it may occur largely without fanfare.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

The process of orchestrating initial public offerings can take up to two years. In order to go public, a company is required to file a great deal of supporting data with regulatory agencies. These filings include information which can be used by investors to determine whether or not a company is a good buy. Regulatory agencies also protect the public by monitoring the health of companies and carefully regulating the filing process to ensure that people get the information they need to make an informed decision about stock purchases.

While regulatory filings are occurring, lawyers are usually busy handling the myriad legal details involved. The company also works with one or more underwriters to determine what kind of stock should be offered, what the starting price should be, and when it should be offered. The underwriters also determine how the stock will be offered during the initial public offering, as there is often more demand than available stock.

At initial public offerings, prices can vary. Some companies keep prices low because they want to encourage people to buy up their stock as quickly as possible. Others may keep prices higher, wanting to avoid losing out on potential capital which would be lost by undervaluing their stock. The price of the stock can rapidly rise if it is a hot commodity, but it can also decline just as quickly. Participating in initial public offerings can be a risky endeavor for members of the investment community, as they may stand to gain a great deal from purchasing stock at the right time, or they could lose a lot by failing to predict the direction of movement.

When companies go public, their employees may be entitled to some stock shares as part of a compensation agreement. For small companies, sometimes stock shares are built into contracts, with people agreeing to work for lower pay in exchange for the opportunity to earn money from stocks later. For employees with especially good contracts, it's possible to become a millionaire overnight as a result of an IPO.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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