IPO definition

What is an IPO?

IPO is the abbreviation used to describe an initial public offering – the first sale of stock issued by a company. Prior to an IPO, the company is defined as ‘private’ because its shares are only available to early investors. After an IPO, share ownership is opened out to the wider market, which is why IPOs are  also known as floating, flotation, or ‘going public’. 

When a company embarks on an IPO, it lists a certain number of shares on a stock exchange in order to raise investment capital. IPOs are one of many ways in which companies can seek to raise capital, with other popular options including finding major investors, crowdfunding or using retained earnings.

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Pros and cons of IPOs

Pros of IPOs

A successful IPO can raise huge amounts of capital. An example of an IPO is when Alibaba floated on the New York Stock Exchange (NYSE) in 2014, and raised over $20 billion. Becoming listed on a stock exchange helps to increase the exposure, prestige and public image of company, which means that IPOs can increase the firm’s sales and profit in the future and give a more accurate valuation of a stock.

For traders, a float can be a great way of buying a share of a company – or taking a position on its price trajectory – the moment it hits the stock market. IPOs also increase liquidity on the market, which makes it easier for buyers and sellers to fill their orders.

Cons of IPOs

When a company is listed on a stock exchange, it becomes subjected to the rules and regulations of a governing body. This means that it is required to disclose financial information – including accounting, tax and profits – all of which can be useful to competitors.

Although the dissemination of information is potentially a con for businesses, for traders it makes the analysis of a company and its share price trajectory much easier because information is readily available.

IPOs also incur considerable costs to the company and require it to make itself fit for the public eye. There is also the possibility of additional funding if the market disagrees with the IPO price, which can send the share price lower straight away. These risks make floating a costly consideration for a business.

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