What is an IPO?
IPO is an Initial Public Offering. Some of you may have seen the movie “Wolf of Wall Street”, when Leonardo DiCaprio told us what IPO means. If you haven’t seen the movie, or just simply forgot, here’s our explanation of it.
Initial Public Offering, is when any private company goes public. Meaning that from now on it can issue shares that investors can buy, increasing firm’s capital. This gives a lot of flexibility for the companies as they do not need to look for private investors and they can attract capital from all over the world. They can do all kinds of activities with that money, such as Research and Development, increasing the size of the company, penetrating new markets, launching new products, expanding its influence, buying new plants and equipment, and so much more. For investors in return it allows to make some money out of it. If the management is managing its resources properly, the company will most likely grow, making it a win win situation both for the company and for the investors.
And at the same time going public means opening your financial statements to the general public and competitors. From now on your business needs to be as clean as possible, because you have the responsibility before your investors and SEC, Securities and Exchange Commission, and many other legal entities. Well, the company had to follow all these responsibilities before going public, it’s just that from now on, this is triple serious.
While going through an IPO, one of the most import things to do is to find an underwriter, and compose a Prospectus. We will go through both these things soon enough. But basically, underwriter is an insurer, usually a bank or financial institution, and Prospectus is a summary of the company, telling mainly its scope of activities and financial data.
One last thing to remember is that companies can go through IPO more than ones. But first, the company needs to go from public to private again, so that they can go public for the second time. It’s done so to issue a big amount of shares at a short period of time. Usually, second IPO is not a good sign, especially if a company does that to cover its debt.