Initial Public Offerings: Good or Bad Investments
An initial public offering (IPO) is the first sale of stock by a private company to the public. Most of the time IPOs are issued by young emerging companies looking for funds to expand the business, but in some occasions are offered by large privately owned companies that intend to become public traded. In an IPO, the issuing company is assisted by an underwriting firm, which helps determine the type of security that will be issued, either common or preferred, the best offering price and the time to bring it to the market. Doing an IPO is also referred to as “going public.”
Companies fall into two vast categories: Privately held companies and Public held companies. In privately held companies there are just a few shareholders, and the owners don’t have to provide much information about the company. Most small businesses are privately owned, but some large companies such as Domino’s Pizza and IKEA are privately held too. It is usually not possible to buy shares in a private company. On the other hand, public companies have sold at least a portion of themselves to the public and their shares are traded on the stock exchange market. Public held companies have thousands of shareholders, who are subject to strict rules and regulations. Public companies must have a board of directors and it must report financial information every quarter.
For an IPO to be done, it has to go through something known as underwriting. Underwriting is a process by which investment bankers raise investment capital from investors in representation of corporations and governments that are issuing securities. When a company wants to go public, first thing it does is hire an investment bank. Theoretically a company could sell its shares on its own, but being realistic, an investment bank is needed because of the way that Wall Street works. Underwriters are basically middleman between companies and the investing public; they assist...