Initial Public Offering (IPO) is when a company lists its shares on a stock exchange in order to sell them to institutional and retail investors. The process is typically underwritten by one or more investment banks.
As an investor, buying an IPO stock can sometimes yield substantial returns but before investing in one, it is crucial to understand how buying an IPO stock is different from regular stock investing, as well as get acquainted with potential risks and rules of this investment.
Both new companies and those that have operated for years can decide to go public via an initial public offering. Most of the time, companies decide to launch an IPO to raise funds to settle debts, invest in growth initiatives, or improve their public image.
If a company decides to become publicly listed through an IPO, it then has to hire an underwriter who takes care of the securities registration process and listing of the shares. After that, the lead underwriter forms a group consisting of banks and brokers who are in charge of selling the IPO shares to investors.
There are also certain risks of going public via an IPO. One of the key disadvantages of this initiative is the time and money required to complete it. Launching an IPO requires hiring a number of investment bankers and accountants, as well as other consultants. Furthermore, it could take up to a year to complete the process, and if not timed well, an IPO can significantly damage a company’s growth and financial prospects.
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