Initial public offering

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors[1] and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchange. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize the investments of private shareholders such as company founders or private equity investors; and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.

After the IPO, those shares which trade freely in the open market are known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of share sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information.

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale). Alternative methods such as the Dutch auction have also been explored. In terms of size and public participation, the two most notable examples of this method are the Google IPO[2] and Snapchat's parent company Snap Inc.[3] China has recently emerged as a major IPO market, with several of the largest IPOs taking place in that country.[4]

  1. ^ Note: the price the company receives from the institutional investors is the IPO price
  2. ^ Edmonston, Peter. (19 August 2009) Google's I.P.O., Five Years Later – Retrieved on 2012-10-16.
  3. ^ "4 Major Risks To Note When Snap Begins Trading On Thursday". Retrieved 14 March 2017. 
  4. ^ "China IPO market". Retrieved 21 April 2016. 

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