An Initial public offering or IPO is a type of public offering in which shares of a company are sold to institutional investors and, to a lesser extent, retail investors (members of the public). This process, colloquially known a floatation, or going public, a previously privately held company is transforms into a public company. The offer can be comprised of existing shares, where the founders or venture capitalists look to cash in on their investment such as the sale of a previous acquisition or merger. Or new stock may be issued thus expanding the share capital of the company.
One the Initial public offering is complete and the stock is freely traded on a stock exchange, the flotation enables easy trading of existing holdings or future capital raising if required. The drawback to the company is the rules and regulations to which it becomes subject. The disclosure of financial information such as accounting, tax and profits may prove to be, and indeed has been to much of a burden for some. There may also be a lockup period preventing founders from exiting their holding for a given period of time. To simplyfy the IPO process some companies are now choosing to obtain a public listing through the use of a Special Purpose Acquisition Company (SPAC). This involves an already public listed fund usually set up by a private equity firm which purchases the private company. The private firm then begins to operate as a public firm without the expense ot time required of an IPO filing.
Any company can choose to initiate an IPO at any time. Startup companies or companies that have been in business for decades can decide to go public through an IPO. Generally, an Initial public offering is underwritten by one or more investment banks, who for a generous fee, also arrange for the shares to be listed on one or more exchanges.
Initial Public Offering Investment Strategy
Investing in Initial public offering‘s is a recognized stock market alternative investment strategy in its own right. Mangers scour the prospectus and official document much like a merger arbitrageur for clues as to the profitability of the trade. On the first day of trading, many investors get swept up in the hype that can surround a fledgling company in a high growth industry. It is not uncommon to see stocks doubling on their first day of trading. This level of outperformance underscores the importance in understanding the industry and potential profitability of the company to avoid overpaying once the stock is available.
Additionally, Special Purpose Acquisition Company (SPAC) arbitrage is also a modern twist on how traders can profit from IPO’s.
