What is an IPO (Initial Public Offering)?
What is an IPO?
An Initial Public Offering (IPO) happens when a private company sells private shares to the general audience in a stock market.
The stock exchanges included may be the London Stock Exchange, the New York Stock Exchange, Euronext, or the Hong Kong or Shanghai Exchanges, etc. But unless you are a big company, it will probably be an exchange that specializes in smaller companies like the London Investment Market (AIM), for example.
The transition of a private company to a public company can be an important time for private investors to obtain the gains from their investment, as it usually includes a share premium for existing private investors. Moreover, it presents an opportunity for public investors to participate in the offering.
The stock exchanges included may be the London Stock Exchange, the New York Stock Exchange, Euronext, or the Hong Kong or Shanghai Exchanges, etc. But unless you are a big company, it will probably be an exchange that specializes in smaller companies like the London Investment Market (AIM), for example.
The transition of a private company to a public company can be an important time for private investors to obtain the gains from their investment, as it usually includes a share premium for existing private investors. Moreover, it presents an opportunity for public investors to participate in the offering.
How does an IPO work?
Before an IPO, a company is considered private, meaning it is not listed on a stock exchange. As a private company, the business has grown with a relatively limited number of shareholders, including initial investors such as the founders, family, friends, and professional investors.
An IPO is a big step for a company because it allows it to gather a lot of money. This influx of funds provides the company with greater potential for growth and expansion.
When a company reaches a certain stage in its growth process and believes it is ready to involve other shareholders, it starts expressing its interest in becoming a publicly traded company. This growth phase is typically achieved when a company reaches a private valuation known as unicorn status.
During the IPO process, the company's shares are priced through subscription due diligence. As the company goes public, the private ownership previously held by shares converts to ownership by multiple investors, and the private shareholders' shares become valued at the exchange trading price.
Meanwhile, the market opens up a huge opportunity for millions of investors to buy company shares and contribute capital to a company's shareholders.
The number of shares sold by the company and the price at which they are sold determine the value of the company's equity to new shareholders. Equity represents shares held by investors, both when it is private and publicly traded. However, with an IPO, equity increases significantly due to the influx of funds from the primary issue.
An IPO is a big step for a company because it allows it to gather a lot of money. This influx of funds provides the company with greater potential for growth and expansion.
When a company reaches a certain stage in its growth process and believes it is ready to involve other shareholders, it starts expressing its interest in becoming a publicly traded company. This growth phase is typically achieved when a company reaches a private valuation known as unicorn status.
During the IPO process, the company's shares are priced through subscription due diligence. As the company goes public, the private ownership previously held by shares converts to ownership by multiple investors, and the private shareholders' shares become valued at the exchange trading price.
Meanwhile, the market opens up a huge opportunity for millions of investors to buy company shares and contribute capital to a company's shareholders.
The number of shares sold by the company and the price at which they are sold determine the value of the company's equity to new shareholders. Equity represents shares held by investors, both when it is private and publicly traded. However, with an IPO, equity increases significantly due to the influx of funds from the primary issue.
Advantages & disadvantages
A company going public can be very beneficial for its credibility. To be listed on a stock exchange, companies must meet certain requirements and disclose information, which leads the public to trust them.
Another advantage is capital raising. Companies can secure funds for various purposes, including hiring, debt reduction, development, and more.
Despite these advantages, there are also some less positive points that companies may face when going public.
One of them is the cost of the process, which is quite expensive. You usually need to hire lawyers, investment bankers, accountants and consultants. Complying with financial reporting also has an associated cost and is complex.
When a company goes public, it is under pressure to maintain its performance and has to put its long-term growth strategies aside to make room for the short-term results that investors need.
Another advantage is capital raising. Companies can secure funds for various purposes, including hiring, debt reduction, development, and more.
Despite these advantages, there are also some less positive points that companies may face when going public.
One of them is the cost of the process, which is quite expensive. You usually need to hire lawyers, investment bankers, accountants and consultants. Complying with financial reporting also has an associated cost and is complex.
When a company goes public, it is under pressure to maintain its performance and has to put its long-term growth strategies aside to make room for the short-term results that investors need.
