What is an IPO?

IPO (short for Initial Public Offering) is an initial public offering, the process of a company or early investors selling shares of a private company on the stock market, as a result of which the company becomes public and the securities are available to a wide range of investors. The list of intermediaries in this transaction includes underwriters, stock exchange, brokers, auditors, PR services, legal support, etc.

For the company, the sale of shares is not just an alternative to debt financing, which burdens the company with regular interest payments, it is a step to a new level: along with the status of a public company, the company receives many other advantages:

  • - Improving reputation with partners and creditors
  • - Ability to determine the market price of a business
  • - Greater business transparency, which increases efficiency
  • - Subsequently, the company can conduct secondary placements to finance new investment projects wide diversification
  • - The liquidity of securities and the ability to determine the market price allow you to use your own shares as an alternative to money, pay for M&A transactions, pay bonuses to employees, etc.

However, at the same time, the company acquires many additional obligations, both to thousands of new investors and to regulators.

As mentioned above, early investors can also act as sellers on an IPO - for them this is a great chance to take profit from investing in capital. Traditionally, the normal ratio of the volume of shares sold by a company and investors is 50:50, however, a lot depends on the specific situation. By the way, many corporations, especially American ones, offer their employees more favorable conditions for purchasing shares at an IPO, which simultaneously increases their loyalty and allows them to provide additional funding.

Despite the complete transparency of financial data and information about the state of the business, one should not forget that for IPO investors it is quite a risky event - it is difficult to determine not only the fair value of securities, but also the direction of the medium-term trend: most companies entering the market are young and are in phase of dynamic growth, which adds uncertainty and risks, making it difficult to predict the potential of the stock.

Difficulties in the analysis are added by the excitement around the so-called "hot IPO", the demand for which is much greater than the supply. Examples of “hot IPOs” are Facebook, Twitter, GoPro, Ferrari, Square, etc. Often, the growth of shares of these companies on the first day exceeds 50-60%, but the opposite trend is also possible.