IPO (Initial Public Offering)
An IPO is the first sale of stock by a private company to the public, allowing the company to raise capital from public investors and become publicly traded.
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Exam Tip
IPO = primary market. Red herring = preliminary prospectus. Lock-up = insiders can't sell immediately.
What is an IPO?
An Initial Public Offering (IPO) is when a private company offers shares to the public for the first time. This process transforms a private company into a publicly traded one.
The IPO Process
| Stage | Description |
|---|---|
| 1. Hiring underwriters | Investment banks manage the offering |
| 2. Due diligence | Audits, legal review, preparation |
| 3. SEC registration | File S-1 registration statement |
| 4. Road show | Present to institutional investors |
| 5. Pricing | Set initial share price |
| 6. Trading begins | Stock listed on exchange |
Key Documents
| Document | Purpose |
|---|---|
| S-1 Registration | Detailed company information filed with SEC |
| Prospectus | Disclosure document for investors |
| Red Herring | Preliminary prospectus (no final price) |
Why Companies Go Public
- Raise capital for growth
- Liquidity for existing shareholders
- Currency for acquisitions (stock as payment)
- Prestige and visibility
- Employee stock options become valuable
IPO Pricing
| Term | Meaning |
|---|---|
| Offering Price | Price shares sold to public |
| Opening Price | First trade price on exchange |
| Pop | When opening price exceeds offering price |
Risks of IPO Investing
- Limited history as public company
- Lock-up period - Insiders can't sell for 90-180 days
- Volatility - Prices often fluctuate wildly
- Allocation - Retail investors may not get shares at IPO price
Study This Term In
Related Terms
Prospectus
A prospectus is a legal document filed with the SEC that provides details about an investment offering, including risks, fees, objectives, and management.
SEC (Securities and Exchange Commission)
The SEC is the U.S. federal agency responsible for enforcing securities laws, regulating securities markets, and protecting investors from fraud and market manipulation.
Underwriting
Underwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.
Secondary Market
The secondary market is where previously issued securities are bought and sold between investors, with proceeds going to the selling investor rather than the issuing company—including stock exchanges like NYSE and NASDAQ.
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