IPO = Initial Public Offering
An Initial Public Offering (IPO) is the time at which a private company decides to offer shares of stock on a public exchange for the first time. IPO’s can be issued by any size company, but they typically tend to be smaller, less mature companies seeking capital to fund expansion. Because of this, trading and/or investing in IPO’s can be risky ventures since most companies participating are going through a transitory growth period, subjecting investors to a high-degree of uncertainty regarding future values.
An IPO requires an underwriter who works closely with the issuing company to determine offering price, number of shares to be issued, and the best time to bring it to market. The underwriter evaluates various aspects of the company such as the business model, financial performance, executive talent, and future expectations in order to make their ultimate “value” determination. The entire process involves lawyers, certified public accountants, and Securities and Exchange Commission (SEC) experts as well.
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Thanks for the explanation on what an IPO is.
I have seen it mentioned many times on the news, but never really knew what they were about. I remember seeing internet companies being valued high then folding a short time later.
Isn’t that how Mark Zuckerberg made his fortune, when Facebook had its IPO?
Hi Chris. When Facebook IPO’d back in 2012, it immediately made Mark Zuckerberg worth billions of dollars due to his sizable stake in the company. Today, his net worth currently sits at over $50 billion and equates to about $4 million for every day of his life. Keep in mind that he still received substantial compensation before then though – the IPO isn’t entirely responsible for his fortune, although it was a big reason for how massive his net worth has become.
Hello Matt, thank you for explaining in simple terms what an IPO is. I knew what the initials stood for but did not understand how it works until I read your article. I am surprised to learn that companies issuing IPO’s tend to be smaller ones.
But I certainly understand that since these are new companies going public there would be some degree of uncertainty with regard to trading in those stocks. Thanks again for a good overview of how the process works.