What Is the IPO Market?

The initial public offering (IPO) market is the area of the financial market that focuses on companies just going public with their first offering of stock. Activity levels in this part of the market depend on investor confidence, economic conditions, and how many companies have an interest in going public at a given point in time. Financial publications tend to watch the IPO market because it can provide insights into the movements of the rest of the market. Investors can keep an eye out for planned IPOs and news about market activity by following financial media and working with personal finance advisers who are familiar with IPOs.

Companies use IPOs to raise capital for their endeavors. Some may be backed by venture capitalists with interest in taking a company public quickly to tap into investor funds. Others may be more venerable, with a reputation behind them and the ability to command high share prices at their IPOs. Before a company enters the IPO market, it has to plan the offering carefully. Personnel will go through a series of meetings to decide on whether going public is the right choice, and how it should be conducted.

Investors watch the IPO market carefully. Any companies signaling an intent to initiate an IPO by filing declarative paperwork, meeting with underwriters, and engaging in similar activity will attract attention. The media may start following their activities more closely and will profile them for the benefit of investors. Investors want to know as much as possible about planned IPOs so they can decide if they want to get involved with the offering, or wait and see how the stock performs before buying.

Stocks enter the IPO market through the work of underwriters. Usually large investment banks, underwriters receive blocks of shares from the company on its IPO date. They receive a discount for buying in bulk and in turn sell the shares to other institutional and big investors who can buy lots of shares. The shares trickle out through the IPO market to progressively smaller investors and typically gain value over the first day of trading. Performance on that day is tracked closely, as it can provide indicators on how investors feel about the company.

In periods of economic uncertainty, the IPO market is often sluggish. Investors may prefer to stock their portfolios with tried and true companies that have a known track record. This can diminish interest in new offerings. Companies that choose to move forward with IPOs may not be able to get a high share price and could face a situation where their offering is not fully subscribed and the underwriters are left with extra shares at the end of the day.