October 22, 2020

What is IPO?

What is IPO?

The company is launching an IPO to attract additional finance for business development. What is IPO? IPO (Initial Public Offering) is an initial public offering of securities on the stock exchange. After appearance on the stock market, the organization with a private one becomes public. Anyone who has access to the stock exchange can buy its assets.

Reasons for the company’s IPO:

  • money. IPO is one of the ways to attract multimillion investments;
  • popularity. To apply for an IPO is the same as to conduct a global advertising campaign;
  • reputation. If securities are controlled on a well-known stock exchange, it means that the company has good financial results;
  • transparency. The activity of joint stock companies is controlled by state bodies. The activity of the issuer is transparent and investors’ interests are protected.

You can make money on:

  • the difference between the price of a stock at the time of distribution of stocks in the IPO and its value on the opening day;
  • the growth of the stock price from opening to closing of trading sessions at the exchange – if demand is high, the price of securities may rise by 10-30% per day;
  • receipt of dividends from a company, if we consider the IPO as a long-term investment – most (72.7%) companies after the IPO start paying dividends after 3 years of stable profit.

What is IPO in simple words

IPO is an initial public offering on the stock exchange.  As soon as the securities start to be traded at the exchange, the company obtains the status of public. Financial advisors or underwriters are hired to conduct the IPO. Most often these are investment banks. Underwriters help determine the price of the stock, conduct a marketing campaign to attract investors, collect initial applications for purchase of securities before they become publicly available on the exchange.

Usually IPO is held in four stages:

  1. Preliminary. The company prepares reports and assesses its financial position and business performance. The stage can take several years.
  2. Preparatory. A company selects underwriters and an exchange for listing. An investment memorandum is developed for potential stockholders and documents are submitted to the financial regulator. In case of approval for listing, an advertising campaign is launched, a series of meetings between underwriters and business representatives and potential investors.
  3. The main one. The underwriter generates a so-called book of applications from those wishing to buy stocks before trading on the exchange. It defines the stock price, its number and dividend policy.
  4. The final one. Part of the stocks is distributed among investors from the order book. Then exchange trades are started.

Advantages of participation in IPO

Despite the disadvantages, investors are willing to participate in primary placements due to the high potential yield. Usually a company puts its stocks on the stock exchange at a discount to stimulate demand for them. Therefore, in the first days after the IPO, the securities are more expensive than cheaper.

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