What is an Initial Public Offering?

by Girl Banker 

All businesses are owned by a private individual or group of private individuals when they start out. After a certain point, a company can choose to raise equity capital from the public by listing on a stock exchange in an initial public offering.

Once shares have been listed on a stock exchange they are available to anyone (even you and me), to buy and sell in the secondary market.

Money raised in an IPO goes straight to a company from investors. However, after those shares are listed, they are bought and sold between investors and the company does not benefit from these secondary market transactions.

For example, if I bought shares in LinkedIn as a private investor in the IPO when they were listed on the New York Stock Exchange on 19 May 2011, I would have paid USD83 for them. Demand was very hot for these shares; if I had sold them to you the day after the IPO, I could have sold them for as much as USD107 and bagged the difference (USD24, in this case) as profit. The shares were undervalued at the point of listing.

All day long people buy and sell shares: high demand to buy shares pushes the price up; a high supply of shares offered for sale forces the price down.

The IPO process is governed by a lot of documents and conventions. To guide it through the process a company hires specialists; two key specialists are an investment bank and a law firm.

The investment bank knows the process inside and out and it has access to a list of investors that may be interested in buying the listing company’s shares. The lawyers understand and draft the transaction documentation. Together they produce an IPO prospectus, a legal document filed with regulators detailing any reasonable information a prospective investor needs to make the decision of whether or not to buy the shares being offered.

Extracted from: To Become an Investment Banker

---

Who is Girl Banker® and how can she help you?