Initial Public Offerings (IPO's)

Initial Public Offerings (IPO's)

Length: 1487 words (4.2 double-spaced pages)

Rating: Excellent

Open Document

Essay Preview

More ↓
Initial Public Offerings (IPO's)


The term "IPO" slipped into everyday speech during the tech bull market of the late 1990s.

Back then, it seemed you couldn't go a day without hearing about a dozen new dot-com millionaires in Silicon Valley cashing in on their latest IPO. The phenomenon spawned the term "siliconaire," which described the dot-com entrepreneurs in their early 20s and 30s who suddenly found themselves living large due to IPOs from their Internet companies.

So, what is an IPO anyway? How did everybody get so rich so fast? And, most importantly, is it possible for mere mortals like us to get in on an IPO? All these questions and more will be answered in this tutorial.

Before we continue, we suggest you check out our stock basics tutorial as well as brokers and online trading if you don't have a solid understanding of stocks and how they trade.
IPO Basics: What is an IPO?


Selling Stock
IPO is an acronym for Initial Public Offering. This is the first sale of stock by a company to the public. A company can raise money by issuing either debt (bonds) or equity. If the company has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents, and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza, and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the SEC. In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity.

How to Cite this Page

MLA Citation:
"Initial Public Offerings (IPO's)." 123HelpMe.com. 26 Jan 2020
    <https://www.123helpme.com/view.asp?id=72022>.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Initial Public Offerings - IPO Essay

- A Basic Understanding of Initial Public Offerings Table of Contents Creation of IPOs ………………………………………………………………………………… 2 Contract ……………………………………………………..…………………………… 2 Structured Agreements ………………………...………………………………………… 2 Underwriters ……………………………………..……………………………………… 2 Securities and Exchange Commission (SEC) …………………………………………………… 2 Registration Statement …………………………………...……………………………… 2 Investigation …………………………………………...………………………………… 3 Prospectus …………………………………………………..…………………………………… 3 Red Herring ……………………………………………………………………………… 3 Road Show ………………….…………………………………………………………… 3 Price …………………………...………………………………………………………… 3 IPO Allocation ……………………...…………………………………………………………… 3 Institutional Investors …...   [tags: Business Finance]

Free Essays
1525 words (4.4 pages)

Investigating The Initial Return Of Nonfinancial Initial Public Offerings?

- The primary aim of this report is to critically investigate the initial return of nonfinancial Initial Public Offerings (IPOs) that went public on the London Alternative Investment Market (AIM) between the period of January 2005 and December 2014. An IPO is an offering of shares to the public, where new shares are sold to raise cash for the firm (Allen, F., Brealey, R and Myers, S (2010)) The market attracts mainly small and medium companies because the listing requirements are less restrictive than the London Stock Exchange (LSE)....   [tags: Initial public offering, Stock market]

Research Papers
954 words (2.7 pages)

Initial Public Offerings Essay

- #1 Fluidigm made the decision to expand their company and in order to raise the capital on April 2008, Fluidigm filed with the Securities Exchange Commission (SEC) to become a public company and trade on NASDAQ. The company had hoped to raise $80 million in the Initial Public Offering (IPO) and had priced the shares at $14 to $16 a share. On the first day of trading on September 5, 2008, not all went as planned for this venture backed company. “The week that Fluidigm hoped to go public was one of the most tumultuous in market history, with Lehman Brothers’ bankruptcy, the sale of Merrill Lynch, and a freezing of the credit markets” (Miller, 2008)....   [tags: stock market, Fluidigm, NASDAQ]

Research Papers
1221 words (3.5 pages)

IPO Spinning Essay

- The topic of IPO spinning is one that has not received much attention in the recent past. Amidst the recent financial crisis we have experienced the IPO market became relatively quiet. However, there is a large consensus that the IPO market may become much more active in the near future and it seems like an appropriate time to look at an issue that may again surface. We examined the article “A New Look at an Old Trick: IPO Spinning” from The Wall Street Journal. This article gives a brief outline of what IPO spinning is, a look at one of the more high profile cases of Frank Quattrone, and provides some evidence of the effects it has from a study by Xiaoding Liu and Jay Ritter....   [tags: Economics]

Research Papers
848 words (2.4 pages)

Initial Public Offering Vonage Essay example

- Initial Public Offering Vonage Introduction Vonage the worlds leading provider of Voice Over Internet Protocol telephone services began in 2001, by 2002 they had their first residential customer. Vonage's decision to expand and acquire a larger customer base led to their IPO in May 24th, 2003. The difficulties faced by Vonage are no exception, many companies struggle with the decision of going public and timing....   [tags: Business Trading Stocks Public]

Free Essays
1503 words (4.3 pages)

The IPO of XYZ Construction Inc. Essay

- XYZ Construction Inc. like many other organizations has outgrown its geographical boundaries and as a result the leadership team plans on expanding its horizontal construction nationally and internationally. du Plessis (2009) suggested that globalization and internationalization challenges are now demanding that organizational managers fine-tune or draft new policies and procedures to stay competitive in the global markets. As such, the leadership within XYZ Construction Inc. has also decided to transition from a private to a public ownership construct and launch its initial public offering (IPO)....   [tags: Corporate Strategy]

Research Papers
1815 words (5.2 pages)

An Initial Public Offering ( Ipo ) Essay examples

- An initial public offering (IPO) is often a dream of those involved in every startup company. It offers a chance to expand the firm to the highest level of productivity, competing against the top corporations in the world such as Apple and IBM. Although going public may result in continued success, it is always not the best decision for a business wanting to expand. It is more beneficial for a company to remain privately owned because it allows the firm to stay in complete control posing less risks in a cost efficient manner....   [tags: Public company, Privately held company]

Research Papers
1906 words (5.4 pages)

Essay about Phenomenon of Underpricing

- When private companies make the transition to becoming public companies listed on a stock exchange, the phenomenon of underpricing in Initial Public Offerings (IPOs), defined as the difference in the closing price of an offer (finalised offer price) and the closing value of a security on a stock exchange, have been extensively researched and have been found to be pervasive on a global level (Loughran et al, 1994) Various literature exists to establish factors in trying to explain this phenomenon of underpricing through different theoretical frameworks....   [tags: Literature, Price Offerings]

Research Papers
2467 words (7 pages)

High Return Of The Ipo Essays

- Previous studies have documented a clearly high return of IPOs in the short term and a generally negative return in the long run. Short-Run Underprice Ibbotson (1975) founded the first year return of the IPO was on average above zero, however, there exist a negative performance in the following three years. He concluded a generally short term under-priced and a long term underperformance for the companies after going public. Long-Run underperformance Ritter (1991) documented the long-run performance of the initial public offering is typically under-perform the benchmark....   [tags: Stock market, Initial public offering]

Research Papers
717 words (2 pages)

Essay on Practice of the Initial Public Offering IPO in the UK

- Initial Public Offering S/F/101. Initial Public Offering - IPO The paper examines the practice of Initial Public Offering (IPO) reviewing IPO requirements in the UK, the types of IPO, etc. The issues of setting IPO prices are addressed discussing examples of shares' under pricing. P/F/438. Role of venture capitalists in IPO marketThe paper examines the issues of venture capital investments discussing the role of venture capitalists in affecting IPO (initial public offering) pricing, and reviewing the hypothesis on the correlation between the presence of venture capitalists in the IPO market and a reduction of information asymmetry....   [tags: Finance Accounting]

Free Essays
1148 words (3.3 pages)

Related Searches

If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock.

Why Go Public?
Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:
•     Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
•     As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
•     Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

The Internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their business. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. In VC talk, this is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money. In our opinion, IPOs like this are extremely risky and should be avoided.
IPO Basics: How can I get in on an IPO?

The Underwriting Process
Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting.

When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley.

The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued, and all the details in the underwriting agreement. The deal can be structured in a variety of ways. For example, in a "firm commitment," the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a "best efforts" agreement, however, the underwriter sells securities for the company but doesn't guarantee the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the others sell a part of the issue.

Once all sides agree to a deal, the investment bank puts together a registration statement to be filed with the SEC. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used, and insider holdings. The SEC then requires a "cooling off period," in which they investigate and make sure all material information has been disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public.

During the cooling off period the underwriter puts together what is known as the red herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a road show - also known as the "dog and pony show" - where the big institutional investors are courted.

As the effective date approaches, the underwriter and company sit down and decide on the price. This isn't an easy decision: it depends on the company, the success of the road show, and most importantly, current market conditions. Of course, it's in both parties' interest to get as much as possible.

Finally, the securities are sold on the stock market and the money is collected from investors.


What About Me?
As you can see, the road to an IPO is a long and complicated one. You may have noticed that individual investors aren't involved until the very end. This is because small investors aren't the target market. They don't have the cash and therefore hold little interest for the underwriters.

If underwriters think an IPO will be successful, they'll usually pad the pockets of their favorite institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. But don't expect to open an account with $1000 and be showered with an allocation. You need to be a frequently trading client with a large account to get in on a hot IPO.

Bottom line, your chances of getting early shares in an IPO are slim to none unless you're on the inside. If you do get shares, it's probably because nobody else wants them. Granted, there are exceptions to every rule and it would be incorrect for us to say that it's impossible. Just keep in mind that the probability isn't high if you are a small investor.
Return to 123HelpMe.com