The Chinese company Alibaba Group had the largest IPO in history in 2014 – Image Credit: Thomas Lombard (CC by 3.0)
An initial public offering (IPO) occurs when a private company makes stock available to the public for the first time. An IPO may be issued by a smaller, newer company looking for capital to expand, but can also be initiated by larger private companies that wish to become publicly traded. The company is referred to as the issuer, and is assisted by an underwriting firm. The underwriter makes key determinations such as the kind of security issued, the optimal offering price, the quantity of shares issued, and the appropriate time to bring the IPO to market. As part of this process, the underwriter will form an external IPO team that includes attorneys, bankers, CPAs, and SEC experts. The team will compile a prospectus on the company, including historic financial performance and expected future operations. The financial statements of the company will get an official audit. After review, the company files the prospectus with the Securities and Exchange Commission, setting a date for the IPO.
IPOs can pose a risk to investor, especially when they come from younger companies. Due to lack of historic data, it is hard to tell how the company’s public securities will do on the first day of trading, or in the near future. Even for more established private companies, IPOs often mark a period of transitory growth, making future values difficult to predict.
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