What is IPO?

12 Feb, 2020 Judy Rubio

IPO is a widespread tool in the financial world.However, a lot of people can recall only stories about big returns on investments, not IPO features, pros, and cons. What is this process and what are its features?

What is an IPO

An IPO is held when a commercial entity first withdraws its shares for public sale. The abbreviation stands for Initial Public Offering. After the initial public offering, the company ceases to be private and its new status is public. As a result, anyone can become the owner of the shares. Article "Comparison of IPO and ICO" will help to choose the best direction for investment.

Private companies can also have shareholders, but their number is limited. These organizations are required to meet regulatory requirements. They differ from those put forward to public companies. It usually takes several months to prepare the shares for the initial offering, sometimes the process lasts more than a year. It can result in significant costs for the business.

Why should a business conduct an IPO?

An initial public offering of shares allows a commercial organization to receive investments. The funds raised can be used for reinvestment in infrastructure or for business development.

Another advantage of IPO is to offer options to top managers, which allows hiring the best specialists. Securities can also be used in acquisitions and mergers; they act as a share of payment. An example is the acquisition of Facebook WhatsApp, as a result of which the owners of the messenger received shares of the social network the equivalent of $ 19 billion. And the mere presence of the company in the listing of such exchanges as NASDAQ and NYSE, increases its image.

IPO advantages for underwriters

Investment banks often direct their own funds to IPOs and receive shares of the company before they are placed on the stock exchange. The interest of financial institutions is represented by the difference between the value of securities at which they bought and sold them. With the initial public offering of shares by a promising organization, the competition of banks for the opportunity to act as an underwriter on the IPO can be very large.

To attract attention to the placement of shares, underwriters often organize an advertising campaign. It provides information about the financial performance of the business to prospective investors, even if they are in another part of the world. Often the advertising campaign is carried out for large investors. The process of acquiring securities before the official start of trading was called allocation.

As you can see, the IPO can be beneficial for each party to the transaction: the company, underwriters, investors and directly stock exchanges. The process has a lot in common with ICO, so it is not always easy to choose the best option. Do your due diligence before investing to increase your chances on getting big returns on investment.