IPOs: What They Are and Why They Matter
You don’t need to be an investment expert to have heard the term IPO. In fact, initial public offerings are frequently in the news. But what actually happens when a company decides to “go public”?
For starters: what is an IPO?
An IPO, or initial public offering, is when a company first decides to sell stock in the company to the public, which means selling stock to ordinary people as well as institutional investors like mutual and retirement funds. Going public allows the business owners to raise equity financing. The company issuing the IPO will work with an underwriter to help the company decide what their IPO will look like and what is the best time to bring it to the market.
Why does a company pursue an IPO?
There are many reasons. Some smaller companies pursue an IPO because they are in need of capital to expand their business. Other companies have been privately held for a long period of time and may offer an IPO to get additional equity financing for a merger and acquisition deal.
What's an example of a recent successful, high-profile IPO?
According to a Wall Street Journal report, the drumbeat of initial public offerings has never been louder. For a company like Opower of Arlington, Va., the allure of going public was more than just an idealistic goal. It was an important step in assuring their customers and partners that they would be a smart investment for the long-term.
Opower’s IPO raised $116 million. This case provides a prime example of how the capital markets can help bring extended stability to an individual company.
“We have utility clients that make 30-year decisions and want to pick partners who are going to be around,” Opower Chief Executive Dan Yates told Re/code regarding the company’s decision to go public.
Why does this all matter to me?
IPOs allow businesses to grow, innovate and better serve their customers. While initial public offerings are often first limited to institutional investors, there is a chance that the mutual fund manager of your retirement fund’s 401(k), might decide to make an investment during an IPO. An IPO also determines the initial price of the stock once it begins trading on public markets, such as stock exchanges, where individual investors can begin purchasing the stock.