What is an IPO?
An IPO stands for Initial Public Offering; this is when companies that have not been yet enlisted in “The Market” will make their initial debut sort of speak. Before you can buy stocks (part ownership) in a company the company is know to be “Private” and does not have to give any public information about their finances.
If you decide open a restaurant and it becomes extremely successful, you are not force to release any private numbers in your financials, except for your total revenue and that is only to the IRS to pay taxes. This is what we call a private company. Subway, Hallmark, amongst others are private companies, you cannot buy any shares of stock from them in the public market.
In the other hand if you have multiple locations open and you wish to expand or buy new equipment, better installations, etc.. you can issue stock in the company and sell a portion of it to the public market, this will raise the desired capital or can settle some of your debts. This is why we call this a public company.
[pullquote]IPOs can be extremely volatile, so invest with extreme precautions.[/pullquote]
After meeting up with investment bankers (Underwriting banks), and after they have finished the long process of scrutiny it takes to pass for enlistment into the markets. You will be ready to issue stock to the public in the form of IPOs, or your initial public offering.
Twitter’s IPO case:
(Place your mouse on top of image for Twitter’s IPO fact)
Twitter was only bringing $500 Million dollars in revenue before it’s IPO. The underwriters, or the investment bankers in charge of making sure the company gets listed, priced the stock at $26 a share. Twitter was aiming to raise $1.8Billion dollars; therefore they offered 70Million shares (70Million x $26).
What happens next?
Usually big investment banks get the opportunity to buy stock at the price level, in this case $26. It is really hard at least you are somewhat wealthy to get this type of deals, you will have to consult it with your broker. After everybody gets their shares the opening bell rings and then everybody has access to the rest. Since the stock is new a lot of things can happen:
- The demand is greater than the supply and will send the share price to the roof.
- The complete opposite happens and the stock plummets.
You have to be very careful with IPOs; it takes time for the public to decide what price they are comfortable paying for the company (Facebook stock dropped immediately after being released, and then took another hit decreasing it’s value for more than 50%) making the stocks extremely volatile.