What Is An IPO? The term "IPO" is an acronym for "initial public offering".
An initial public offering is a company's first sale of stock to the general public.
This is the first time that the company has enabled the general public to become
shareholders in the company. This is what the Wall Street phrase "going
public" means.
A company will go public in order to raise money. When the company
executes the IPO, their stock will be listed on a stock exchange for the first
time. The general public will then have the opportunity to buy the stock and
become shareholders in the company. The company will then use this
money for the benefit of the company. They may use it to pay off debt,
build new plants, increase their workforce, or a variety of other things.
When a company decides to go public, they will hire a brokerage firm to
handle the IPO. Sometimes there will be more than one brokerage firm
handling an IPO for a company. The brokerage firms are known as the
underwriters for the IPO. It is their job to sell the new stock to the public. If
there is more than one brokerage firm handling an IPO for a company,
then each of the brokerage firms will have a certain allotment of shares that they
have to sell.
The brokerage firms will write up a prospectus that provides more
details about the company. This may include information about the
company's financial statements, management team, the history of the
company, what they plan on using the money for, and a variety of other
details about the company. The brokerage firms will use the prospectus as
a sales tool.
With their prospectus in hand, the brokerage firms will make the rounds
pitching the IPO to institutional investors. Institutional investors include
mutual funds, hedge funds, and pension funds. They have large amounts
of money at their disposal. That is where the big money is for the
brokerage firms. The brokerage firms want to sell as much of the stock as
they can. They know that...