Common Financial Terms & Concepts

What is an IPO? Meaning, Full Form & Definition

IPO Full Form

The full form of IPO is Initial Public Offering.

What is an IPO? Meaning & Definition

An IPO is a procedure by which a private company declares itself as public by offering its stocks for the first time to the public. By issuing stocks to the public, a company can raise their equity capital with an initial public offering. So, a new or an old private company can offer its shares to the public through the IPO process. By way of an initial public offering, the company gets listed its name on the stock exchange. 

How Does a Company Offer an IPO? Process

Before it becomes public, the company hires an investment bank to handle the process of IPO. The company and the investment bank work together on the financial transaction details of the IPO in the underwriting agreement. 

Afterwards, they document the registration statement, along with the underwriting agreement with the Securities and Exchange Commission. SEC carefully investigates the disclosed information and if once it is found correct, it permits a date to declare the IPO.

When Does a Company Issue an IPO? Reasons

  1. Raising equity capital by issuing an IPO is the prime objective of every company. It may be a new business or expanding business, to better the infrastructure, to improve their business, to pay interest against loans, etc.

  2. A public company can generally issue more stocks, in a demanding market. This will lay the ground to mergers and acquisitions as the stocks can be issued as an integrated part of the deal. 

  3. The primary reason for issuing an IPO is to create liquidity. It also provides an exit opportunity to the company’s employees which are existing investors. 

  4. Companies issue IPOs for visibility and branding of their product and services in the market.

  5. It is a pride and matter of credibility to any company that the brand has achieved success to get its name glanced in the stock exchange. 

How is the IPO Price Determined?

At the moment of IPO, the share price of the company is determined by the company’s valuation, divided by the number of total shares at the listing.

A couple of key factors that add to forming a company's valuation contain: 

  1. Similar companies operating within the same or comparable industries and offering similar products and services. 

  2. The growth prospects of the company beyond the IPO, containing what the IPO funds will be utilized for. 

  3. Quality of management and financial track record of the company.

The demand and supply of the share market decide the price of an IPO. Normally, they are sold at the price at which the buyer of the IPO would like to buy. In actual fact, the procedure of valuation isn’t excessively simple. If an IPO is under priced, at that point an opportunity of taking the gains after the listing is for a long period. Then again, if it is overpriced, after listing you can’t get much profit.

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