An initial public offering, or IPO, is when a company’s shares start trading on a stock exchange and when average people can start investing in the company. It’s also called “going public.”
How it works
Step 1: A company starts out as a private company, meaning it doesn’t have shares that trade. Insiders, such as the founders or employees, typically own most of the company.
Step 2: The company decides to go public. It hires an investment bank to help it figure out the details—such as how many shares to sell and at what price.
Step 3: The company files an S-1 statement with regulators. This form is like a heads-up that the company plans to go public, and it includes details on how much money will be raised plus information about the company’s finances.
Step 4: The investment bank buys up the chunk of shares that’s going to be offered.
Step 5: IPO day: The shares start trading on whatever exchange they are listed on, and the investment bank sells its shares to the public.
The main reason companies go public is to raise money, which they need to expand their business. Some additional reasons may include to:
- Let insiders cash out—Early employees could hold valuable ownership positions in the company but have no way of selling their stakes. After an IPO, they can finally sell their shares (and take that cash straight to the McLaren dealership).
- Get bragging rights—Companies may want the credibility and prestige of having their shares traded on a major exchange.
- Raise awareness—Having a big, splashy IPO can get potential investors excited about the company.
- Attract talent—With publicly traded shares, it can be easier to offer stock compensation plans to employees, which can make the company a more attractive place to work.
Not all companies (even big, well-known ones) decide to go public. Some may even IPO but later decide to become private again. While more money and the best and brightest employees might seem appealing, companies that go public also contend with risks, including:
- Pressure to focus on near-term profits over big-picture priorities
- Making their finances and other sensitive corporate information public
- Complying with extra regulations (and filing tons of mandatory reports)
- The high cost of both preparing for an IPO and keeping up with accounting and regulatory requirements
- Loss of control to shareholders and a board of directors
IPOs vs. secondary offerings
A company can sell more shares in the future even after having an IPO. Those sales are called “secondary offerings,” and they usually happen with less of a bang than IPOs.
An initial public offering, or IPO, is when a company first makes its shares available for sale to the public on a stock exchange. Companies typically decide to “go public” to raise funds but might also want to attract talent, let early investors cash out, or raise their profile with the public. However, going public also has some drawbacks, including loss of control, greater regulations, and making corporate information public.
- When a company IPOs on the New York Stock Exchange, its executives get to ring the bell on the trading floor to start the day’s trading.
- Great IPOs can make terrible stocks and vice versa. Snapchat stock gained 44% on its first day of trading but then lost more than 75% of its value in the next few years. Facebook shares fell when they first started trading but gained about 300% in the following years.
- It’s possible for a company to go public without an IPO. Spotify did so with a so-called “direct listing” in 2018. The downside is a direct listing doesn’t allow the company to raise new money (it only lets existing investors cash out). The upside is that because direct listings are less hyped than IPOs they tend to be less volatile than IPO stocks.
- The largest IPO on record was the public debut of Saudi Aramco—the state-owned oil company of Saudi Arabia—which raised $30 billion in 2019.
- An IPO is when a company’s shares start trading in the stock market. It can also be called “going public.”
- An IPO typically represents the first chance for ordinary investors (like you) to buy into a company.
- Companies go public to raise funds but may also use it as a chance to raise awareness or let existing investors cash out.
- Some companies opt to stay private because they don’t want to deal with the cost, regulations, increased scrutiny, and loss of control that goes with being a public company.
If you bought shares of Google at its IPO, you could probably hire a butler to Google things for you now. — Napkin Finance