What Is an IPO? How an Initial Public Offering Works

When Groupon, Inc. (GRPN) debuted in January 2011, local couponing services were widely touted as the next trend. After that, it sank and kept sinking—in mid January 2024, it was trading at about $13 per share. The trade order is a conditional buy offer, which will become active once the IPO is priced. After what time of the day does the stock market stop trading for the day the price has been set and before the window closes, you can confirm or change your order.

The IPO process

All interested investors are given the opportunity to bid on shares prior to the IPO. This process limits the role of investment bankers, making auction IPO fees generally lower than firm commitment or best efforts. While there were 28 underwriters involved in this offering, given that buyers were found through the auction process, the underwriting fees were almost half compared to other IPOs. The price of a traditional initial public offering (IPO) is determined by the lead investment bank underwriting it. Investment bankers use a combination of financial information, comparable company valuations, experience, and sales skills to arrive at the final offer price before the first day of trading.

All of our content is based on objective analysis, and the how to become it security specialist, salary and degree requirements opinions are our own. An IPO can be an excellent way for a company to raise capital, but it also comes with some risks and drawbacks. This can lead to lower than expected demand and poor performance on the first day of trading. The SEC’s “quiet period” regulations restrict a company’s ability to promote its IPO in the weeks following the offering.

What are the risks of investing in an IPO?

Perhaps most importantly, even if your broker offers access and you’re eligible, you still might not be able to purchase the shares at the initial offering price. Everyday retail investors generally aren’t able to scoop up shares the instant an IPO stock starts trading, and by the time you can buy the price may be astronomically higher than the listed price. That means you may end up purchasing a stock for $50 a share that opened at $25, missing out on substantial early market gains. That’s why a private company that plans to go public hires an underwriter, usually an investment bank, to consult on the IPO and help it set an initial price for the offering. Underwriters help management prepare for an IPO, creating key documents for investors and scheduling meetings with potential investors, called roadshows.

1. It can be quite hard to analyze the fundamentals and technicals of an IPO issuance.
2. Underwriters and interested investors look at this value on a per-share basis.
3. In a direct listing, share price is determined by demand and supply of shares in the market.
4. When investing in an IPO, don’t be swayed by media hype and news coverage.

What is your current financial priority?

How much demand there is for the type of shares being offered is carefully considered as is the valuation of similar companies already listed and the excitement the private company’s growth prospects can generate. There is no guarantee that a stock will resume at or above its IPO price once it’s trading on a stock exchange. Often, a company is overvalued or valued incorrectly, and its stock price plunges after the IPO, never reaching the initial offering price. This became painfully apparent during the dot-com era, which saw millions of investor dollars evaporate as Internet IPOs fell like dominos.

This is a large part of a successful offering because it provides feedback from the market about the share price. IPO or initial public offering is the process of a private company making its shares available to the general public by listing them on a stock exchange. The IPO process allows the offering company to raise capital from public investors to expand operations and fuel growth. In addition, an IPO can be seen as an opportunity for early-stage investors and founders to cash in, as it typically includes a share premium for existing private investors. The final offering price is determined by the investment bankers based on their assessment of what the market is willing to pay for the shares of the company.

Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Ask a question about your financial situation providing as much detail as possible. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The advantages could include a large influx of cash for the company, increased visibility, and a boost in prestige. The registration statement becomes effective after it is reviewed and declared effective by the SEC.

Some IPOs may be overly hyped by investment banks which can lead to initial losses. However, the majority of IPOs are known for gaining in short-term trading as they become introduced to the public. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest. Overall, the number of shares the company sells and the price for which shares sell are the generating factors for the company’s new shareholders’ equity value. Shareholders’ equity still represents shares owned by investors when it is both private and public, but with an IPO, the shareholders’ equity increases significantly with cash from the primary issuance.

After the lock-up period expires, a “flood” of insider selling can put downward pressure on the stock price. The IPO process can be costly and time-consuming, and there is no guarantee that the offering will be successful. It is a massive undertaking for a private company because it must now answer to shareholders, provide regular financial reports, and comply with the Securities and Exchange Commission (SEC) regulations.

Investors in the public don’t become involved until the final offering day. All investors can participate but individual investors specifically must have trading access in place. The most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients. In order to “go public,” a private company hires an investment bank (or several) to underwrite the IPO. Typically in an underwriting agreement, the underwriter agrees to bear the risk of purchasing the entire inventory of shares issued in the IPO before they are sold to the public at the IPO price. Often, to ensure widespread distribution of the new IPO shares, a group of underwriters, called the syndicate, shares in the risk for the offering.

What company holds the largest IPO?

This period typically lasts 180 days, with a minimum of 90 days per SEC law. smart investments on a small budget Several factors can affect the performance of an IPO, including the economic conditions at the time of the offering, the company’s financial condition, the sector in which it operates, and investor sentiment. After an IPO, some clauses may be put into place- for example, underwriters may have a set amount of time to buy more shares after the IPO date.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. The disadvantages could include giving up some control of the company, higher expenses, and greater scrutiny. Going public can increase a company’s visibility and give it more credibility with customers, suppliers, and employees. One notable example of a modern company that went public through an IPO is Facebook.