Initial Public Offer (IPO) – Most heard about
February 17, 08 by FinanceTurf
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Initial public offering, also referred to simply as a "public offering," is the first sale of stock by a private company to the public.
IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.
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IPOs can be a risky investment.
For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.
The IPO can be made by 3 methods which are:-
a) Public Issue through Prospectus – raising the capital by issuing a prospectus to inform and attract the investing public.
b) Offer for Sale – offering the new securities to the investing public by the intermediary like underwriters, merchant banking etc.
c) Private Placement – selling of new securities by an intermediary to selected clients at higher price.
When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order to raise extra capital at the same time.
The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors).
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An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth.
The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company.
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