IPO: What is initial public offering?

An IPO(initial public offering) is an important step taken by companies when deciding to issue shares and place them on the stock market, It is called an Initial Public Offering, which reflects the first public placement of a company's shares.

ipo initial public offering

What is an initial public offering?

Now, you may be wondering, why does a company launch an IPO? Generally, a company issues shares to place them on the stock market to obtain capital. Investors, by buying the shares, provide this capital money, and in exchange, they get a share of the company, which will depend on the number of shares they buy.

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How does an initial public offering work?

As for the operation of the IPO, it starts, as we mentioned, when a company decides to issue shares to place them on the stock market, which allows interested investors to buy and sell the company's securities on the market.

Before the company launches its shares on the stock market, it is considered a private company. When launching an IPO, some of the shares held by the founders of the company and their families, venture investors, and others may or may not be the ones that investors buy. It depends on what part the company decides to place, which will become a public company.

For example, private companies decide to go to the market when they need capital to expand and need investors to inject capital. It is usually considered that the company meets the conditions and requirements of the Securities and Exchange Commission (SEC) of the United States.

Requirements to be able to carry out the Initial Public Offering
To go to market, the company must hire an investment bank
The financial entity must market, analyse market conditions to place the shares
Carry out a prior valuation of the company
In addition to assisting the company owners and private investors in legal and regulatory aspects

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Stages of an initial public offering (IPO)

There are two stages in an IPO process. Below you can see the different aspects of it:

First stage

In the initial stage, it is about preparing the marketing material to market the shares. The investment bank goes out to recruit subscribers to make private offers. As well as in the case that the company has recognition, it will have the task of consulting about the possibility of an Initial Public Offering (IPO).

In this stage, the process of preparing all the documentation that is needed to carry out the official presentation to the regulators also begins.

Second stage

In the second stage, the commercialization process is carried out. There is the process of previous subscription of shares, for which there is a pre-established date to make the IPO. For example, there is the tradition at least on the New York Stock Exchange that allows the president/owner of the company launching the IPO to give the signal to start the day's operations.

Advantages and disadvantages of IPO

There are advantages and disadvantages when carrying out the entire process of an Initial Public Offering (IPO).

Pros

  • Access by the company to the stock market to attract potential investors.
  • Being obliged to present profit reports in addition to greater control of the numbers they can access credit lines. This is because banks give importance to the public reports of the companies to grant them credit which serves them to review their rating.
  • By carrying out the Initial Public Offering the company by placing new shares obtains new shareholders and capital. That is, they have access to investment.
  • By listing on the stock market it manages to expand the name and image of the company achieving a greater possibility of commercializing its products or services.

Cons

  • By becoming a public company, its costs will be higher than when it was a private company.
  • When trading on the market, there is an obligation to report data that the company may not be interested in publishing without the obligation, such as financial and accounting information, and other data that are visible to the competition.
  • Not reaching the amount of capitalization sought through the Initial Public Offering. Although more than a disadvantage, it would be the risk of the IPO going well or badly.
  • When trading, the price of the shares becomes a daily, monthly, and annual concern.
  • Many of the bad measures adopted by the company in different aspects will be reflected in the value of the shares.
  • When new shareholders/investors enter, the direction, strategy, or projects of the company may not be carried out by those who decided the company's path before trading, and even more so if the owners of the company give up control of the company.

Conclusion

Being a company and considering whether to make an Initial Public Offering (IPO) or not, they should know that it can be a before and after in the company and that the advantages can be more than the disadvantages when entering the stock market. Ultimately, the management team must have things very clear and study the operation very well or it can turn out to be the beginning of the end of the company that has cost them so much to build.

If you have any doubts or concepts that are not clear to you, leave them in the comments and we will help you as soon as possible.

FAQs

Why does a company launch an IPO?

Companies launch IPOs to raise capital by selling shares to investors. In exchange for their investment, shareholders receive a portion of ownership in the company, the size of which depends on the number of shares they purchase.

What are the stages of an IPO?

There are two stages in an IPO. The first stage involves preparing marketing materials and recruiting subscribers, while the second stage includes the commercialization process and the subscription of shares.

What should a company consider before deciding to go public with an IPO?

Companies considering an IPO should thoroughly analyze the operation, weigh the advantages and disadvantages, and have a clear understanding of the potential impact on their business and control.

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