You might have come across the term “IPO” while reading a newspaper. Maybe you were wondering about the meaning of it and how it works. Well in this article let us discuss IPO (Initial Public Offering) so that all the doubts of you get cleared.

What is IPO?

The term IPO stands for initial public offering. It is a process by which a private company can go public by sale of its stocks to the general public. The company could be completely new or old which decides to be listed on an exchange and hence goes public.

The company which usually offers its shares is called an ‘issuer’. And the company does so with the help of investment banks. After initial public offering, the company’s shares are now traded in an open market. After buying these shares, investors can further sell them through secondary market trading.

Why does a company offer an IPO?

Initial Public Offering is a money-making exercise. It is a method to collect money as every company needs money to expand, to improve their business, to build the infrastructure, to repay various loans etc. Moreover, A company’s being public indicates that the company now has gained enough success to get its name flashed in the stock exchanges. So it is undoubtedly a matter of credibility and pride to any company.

Should you invest in an IPO?

Investing money in a relatively new company is a little risky and you keep wondering whether you should invest or not. Therefore, do these following things to make sure if you should invest or Nah.

1.Background checks

As the Company is little new and going public recently, it obviously does not have enough historical data to make your decision if you should invest or not. You need to check the red herring data on the IPO details which are provided in the prospectus. Know all the details related to the fund management team and their plans for IPO generated fund utilization.

2. Who is underwriting

When a company is interested in an IPO, the company will advertise to underwriters by soliciting private bids. Or it can even make a public statement to generate interest. The underwriters lead the IPO process and the particular company use to choose them. The underwriters are involved in every aspect of the IPO due diligence, document preparation, filing, marketing, issuance and many more. So before investing, always try to know who is underwriting.

3. Lockup Periods

If you look at the charts of many IPOs, you’ll notice that after a few months the stock sometimes goes downwards. Lockup period is the reason behind this fall of the share price. A lockup period is a state refers to a period of time, the company’s executives and investors are not supposed to sell their shares. As a result, after the lock-up period ends, the share price experiences a drop in its price.

  4. Flipping

Flipping is the process where investors resell an IPO stock in the first few days to earn a quick profit. They usually sell it on the secondary market to get a high return too quickly.

Finally, you have got to know all the thing related to initial public offerings. If you always learn something new, please bookmark us. So, educate yourself first to be called a 1stlearner and don’t forget to share the article.