Ipos Explained Simply Essay
From: Owen Gearty
Date: 7 April 2014
Subject: Initial Public Offering
When a company wants to raise money to further fund its operations it can do so through an Initial Public Offering, or IPO. A private company can choose to sell shares in its company to interested investors, but first the value of a company’s shares must be evaluated. When a company decides to go public it needs to hire an underwriter, or investment bank.
The owner of the company must file an S-I with the Securities and Exchange Commission, or the SEC. An S-I filing is comprised of extensive financial data, legal issues, management background, and various other details about the company. The S-I is a way to show how the company is doing …show more content…
The stock is sold, at its estimated price, to a group of institutions and individual investors that were lined up by the underwriter, or investment bank. This occurs the night before the stock is publicly traded. It is called the “pricing” of the IPO.
Now trading begins the next day. Let’s assume Company X was priced at $20 the night before it is publicly traded. This means the group of investors lined up by the underwriter buy the stock at $20. The next day, however, trading for the stock begins at $50. This undervaluation can happen because of many reasons, usually just unexpected demand for the stock. Company X has now raised the desired amount of money, but could have potentially raised $30 more per share. The people buying at $50, more often than not, are buying it at a price that is too high. It’s like selling a car for $10,000 to Jim, and then finding out that Jim sold the same car for $20,000 the very next day.
When a stock goes public and there is overwhelming demand for that stock the price can skyrocket. But many times these companies cannot maintain and just as quickly as it skyrocketed, the price can plummet. This is what happened in the Dot.com bubble of 1999-2000. Investors couldn’t get enough of new online companies. This overwhelming demand led to inflated prices for almost all companies with a “dot.com” in their name. Prices would soar on the first day of