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What is an IPO?

The first opportunity to invest in a company is referred to as an initial public offering.
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  • Written By: John Sunshine
  • Edited By: Niki Foster
  • Last Modified Date: 24 September 2014
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The Initial Public Offering (IPO) for a new public company is the first opportunity for the investing public to be able to purchase shares in the company. An IPO is a very exciting time for the company, and IPOs are often eagerly anticipated by the investing public as well.

There are several reasons for which a private company may wish to become a public company. The two biggest reasons are to raise capital and to allow the original investors or entrepreneurs who started the company to realize profits on their investment and time. A private company is one in which investment or ownership is limited to select individuals or organizations. A public company is one in which anyone can invest and obtain ownership by purchasing shares on a publicly traded exchange.

Undertaking an IPO is a large and exciting event for a new company. A well received IPO means that the company will have cash to further its development and growth. It also usually means that the people who started the company realize some significant profits for their efforts.

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An IPO requires a great deal of work, from filing the necessary paperwork with the regulatory bodies and writing a prospectus for potential investors to devising and implementing a sales campaign for the sale of the initial shares. Since the company also needs to continue to function and complete its normal activities, a financial firm is usually hired to do this work. This firm is referred to as the underwriting firm for the IPO. For a really large IPO, the work may even be split between several underwriting firms.

The investing public is usually excited about an IPO. It is hard to understand why, since most stocks that are sold during an IPO tend to perform badly at first. Some companies also do not survive, so investing in an IPO is more risky and usually less rewarding then investing in more established stocks. Perhaps investors believe the sales hype that usually accompanies an IPO. Perhaps they are excited about being among the first to own the next potential IBM or Microsoft.

Some IPOs do very well right from the start, and it is these IPOs that are remembered. The IPOs that fail are quickly forgotten, while stories of successful IPOs are re-told and their returns frequently exaggerated. Sometimes, investing is like fishing, more hype than fact.

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