What Does IPO Mean?
What does IPO mean? In simple terms, an IPO (Initial Public Offering) is the process in which shares announced by a company is available to the public for the first time. This system is preferred because it has the support of well reputed investors who underwrite the process. One of the biggest benefits of using this process is the fact that the company sets out to release the IPO is never required to repay its investors. Not only this, but the underwriters also make sure that a certain amount of capital is raised for the company, no matter whether the shares are sold or not.
So, this event in which the company decides to go public by offering shares of stock in the organization for the first time on a securities exchange is quite advantageous for the company (think Facebook in 2012).
If a company is interested in participating the IPO process, they must first compile all the important details of the IPO in a document, which is referred to as a ‘Prospectus’. This prospectus helps the potential buyers to learn more about your company before they decide to invest in it. It helps them learn about some of the major things like:
- The firm’s business model
- The financial performance of the firm in a certain timeframe
- Details about the Board of Directors
Determine the Selling Price of an IPO
The next step is that the company and the underwriter determine the selling price of the initial stock offering by firming up a price and determining what the investors are ready to pay for it. The choice of the investors will depend on the details provided in the prospectus and their eventual impression of the company based on those details and any additional research that is uncovered.
A major role in this process is performed by an underwriter, who works like a bridge (behind the scenes) between the two parties. An underwriter helps negotiating an acceptable price of the stock between a buyer and a seller so that they can reach an agreement which is acceptable to both the sides. The underwriter would aim to keep the price of the stock low in order for the public demand to increase at the time when stock hits the public stock exchange. Its important to note, a good and skilled underwriter would keep the price at a balanced rate, because a price too low would result in a huge loss for the company.
Getting in on a IPO
Now, let’s assume that you are an investor on the buy side, who is looking to purchase into the IPO. There are two ways in which you can get your “piece of the pie.” These two ways include:
- You can get into it by pre-market. Pre-markets are markets that are reserved for huge investors who have large amount of cash at their disposal.
- The other way of getting into it is by investing in the after-market.
The one big disadvantage of pre-market is that if you, as an investor, buy in the pre-market, the rules are such that you may have to lose a great amount of your initial investment. Known as the lockup agreement, this rule restricts an investor to sell his shares until the agreement expires. In most cases, the agreement expires in less than 90 days.
The smartest choice for an investor would be to buy from after-market. This option gives investors full control over their shares and does not include any lockup agreement. To buy an IPO in the after-market, you need to get in touch with your brokerage during the morning of the debut of the IPO you want to invest in. The investor has to put a limit order on the IPO. This is basically a stock order which states the number of shares that the investor wants to buy and the price at which he wants to buy these. After the debut, your order will come into action, provided that all parameters are met, and you will have the ownership of the shares – the IPO, to be exact.