An initial public offering (IPO) is the first sale of stock by a private company to the public. It’s often called “going public”. When you buy shares through an IPO, you hope the price of the stock will go up so that you can sell it and make a profit.
5 reasons why a company goes public
- Raise capital – It can sell shares to raise money to expand and improve its business.
- Get financing – It may be able to borrow more easily and on better terms.
- Attract good people – It will be more likely to offer stock purchase plans or stock options to keep its top employees or attract new ones.
- Create a stronger brand – Going public often creates more media attention so people get to know a company’s brand better.
- Attract other companies – Other companies may evaluate it for potential mergers and acquisitions.
A public company is more closely watched by securities regulators. It also has to meet tougher reporting rules.
2 questions to ask
- What are the risks? – IPOs are usually more risky than a stock that’s been on the stock market for a while. No one can predict how the price of an IPO will change once it goes on sale. Before you decide, read the prospectus from the company issuing the IPO. The prospectus describes the business plan and notes important risk factors. Check whether the company is making money or when it expects to become profitable.
- Are there any fees? – In most cases, you won’t pay any commission to buy an IPO. That’s because the company issuing the IPO hires underwriters to price and market the new stock. Underwriters get large fees for their services. Their fees are built into the initial offering price of the stock.
Find out as much as you can before you buy an IPO. Read the prospectus to understand the company’s growth prospects and the risks. And look for any
warning signs that it could be a scam.