Definition: Initial public offering (IPO) is the initial sale of a company’s shares to institutional investors, who sell them to the public through a securities exchange.
What Does Initial Public Offering Mean?
What is the definition of initial public offering? An IPO represents the first time that a private company offers its shares to the public (going public). Typically, the company accepts bids from a group of investment banks to handle the IPO. The bids take into account how much money the company is likely to make in the IPO. The banks that undertake the IPO handling become the IPO underwriters. An initial offering can serve as a major boost to a firm’s growth. For investors. IPOs are, often, too risky because there are no historical data to compare and make an informed investment decision.
Let’s look at an example.
Example
A typical example of an IPO that incurred investor risk and raised the necessary capital for the company is the IPO of Facebook in 2012. The buzz around the then innovative company had raised investor expectations. At the time that Zuckerberg decided to go public, Facebook had already 500 private shareholders, and more than 800 million users on a monthly basis.
In fact, due to the hype around the offering, the initial price per share of $28 rose to $35 per share, and Zuckerberg increased the number of shares outstanding by 25%, thereby offering 2,74 million shares to the public and reaching a market cap of $104 billion.
On the downside, the offering had some technical problems that prevented more people from placing their orders. Although the share price initially rose, it basically struggled to remain around the offering price of $38, and the underwriters (Goldman Sachs, JP Morgan, and Morgan Stanley) were forced to buy back the shares to technically support the price. However, the following day, the stock declined and kept on falling for around two months close to $20, thereby incurring nearly $40 billion losses for investors.
On the other hand, the Facebook IPO is the third largest initial offering in the history of US exchange markets as it raised $16 billion – Alibaba IPO, raised $25 billion in 2014 and Visa IPO raised $17.9 billion in 2008.
Summary Definition
Define Initial Public Offering: IPO means the first time a company issues stock to the public on an exchange.
