Initial public offerings (IPOs)

An IPO is the first sale of stock by a private company to the public. It’s often called “going public”.

5 reasons why companies go public

  1. Raise capital – The company can sell shares to raise money to expand and improve its business.
  2. Get financing – It may be able to borrow more easily and on better terms.
  3. Attract good people – It will be more likely to offer stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition purchase plans or stock optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition to keep its top employees or attract new ones.
  4. Create a stronger brand – Going public often creates more media attention so people get to know a company’s brand better.
  5. 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

  1. What are the risks? – IPOs are usually more risky than a stock that’s been on the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition 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 prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition 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.
  2. 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.

Caution

No one can predict how the price of an IPO will change once it goes on sale. That makes it a risky investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition.

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