An Initial Public Offering (IPO) is the process of offering shares of a private corporation to the public in a new stock issuance for the first time. It is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO allows a company to raise equity capital from public investors, and it is typically underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, a privately held company is transformed into a public company. Companies can use IPOs to raise new equity capital, monetize the investments of private shareholders such as company founders or private equity investors, and enable easy trading of existing holdings or future capital raising by becoming publicly traded. After the IPO, shares are traded freely in the open market at what is known as the free float.
To invest in an IPO, investors can buy shares directly from the company or through an underwriter. However, it is important to understand that IPOs are very risky investments, delivering inconsistent returns over the longer term. Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO. The SEC requires companies to file a registration statement, typically using Form S-1, which includes a prospectus that describes the company and the IPO terms.
