Initial Public Offer

The initial public offer or better known as initial public offering refers to the first time sale of a particular stock to the public by a private company in the stock market. They are also popularly called as IPOs. Generally the IPOs are issued by newer and smaller companies who want capital for their businesses. The initial public offers are also referred as public offering.

While issuing an IPO, the issuer company needs the help of another underwriting firm. The underwriting firms assist the issuer company in deciding the security type, time to bring the offer to market and also on the best offering price of the share. Once the IPO of a company is listed in the security market, the company has to release its annual reports to the financial securities board.

It is generally risky to invest in the IPOs. Since very little historical information on the issuer company is available, it becomes difficult for the individual investors to predict on the fate of the offer on the first day of its trading. In addition to that, since most of the IPO issuing companies are in their transition of business restructuring and growth, it should be noted that these companies are subjected to the uncertainty regarding their future.

The IPOs are issued in the primary markets. All the money paid by the investors for the IPOs go directly to the issuing companies unlike the later trade of the shares. When a company is in the need for fund, it generally issues IPOs and collects some good amount of money. While issuing an IPO, the issuing company needs to maintain some financial rules and legal processes.

The concept of underwriter plays an important role in the issuance of IPOs. Getting an underwriter is the first step taken by the company while issuing IPOs. Generally it’s the banks that act as underwriter. Once the underwriter is done with helping the firm over determining the price and value of the share, the underwriter sells the share in the security market on behalf of the company. For all the services provided by the underwriting firm, the company pays some amount as the commission.

The common principles of IPOs are that they are offered at comparatively lower price than other shares. This is done in order to encourage the investors to buy more shares.

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Last Updated on : 1st July 2013