What is an IPO?

Last updated on: May 20, 2011 at 7:00 am by Tim

What is an IPO? 2011-05-20T07:00:41-05:00 Tim

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In the world of investing, the term IPO gets tossed around quite often. Those letters stand for Initial Public Offering. It basically means that a company is offering shares of its stock to the public for the first time. This is why the term IPO is often used when talking about a company that is ‘going public.’

Private vs. Public Companies

The basic definition between the two is centered on who owns the shares of stock. In a private company, the owners do not have to sell their shares to anyone who asks. When a company goes public, they provide a certain number of shares to be purchased by anyone willing to invest. Public companies use an IPO as a time to generate cash, which can be a better alternative to borrowing in many cases.

A company might have an IPO to raise money for expansion, debt reduction, or other general growth reasons. If a company is privately held, they might consider going public if the owners want to release their control and make a nice profit from the sale of stocks.

Another benefit of going public is the free publicity that comes with it. With social media and mainstream news covering the financial area closely today, there’s a good chance that you’ll be the top story for a day or two. Who doesn’t like free press?

Should You Invest in an IPO?

The biggest concern with investing in an IPO is that the firm probably has a relatively short history behind its books. If you don’t have a good grasp on how a company is valued, you might be buying into a company that is overvalued and add much more risk to your portfolio.

The hype behind an IPO might lead investors to pursue a stock that they don’t understand fully. Your reason to invest should be founded on the fact that it’s an exciting IPO – it should be based on the soundness of the company.

Finding an IPO

If you want to stay up to date on the newest information about companies going public, you can view an IPO showcase on the New York Stock Exchange’s website.

Here’s the link to view the most recent IPOs.

I don’t know if I’ll be purchasing any stock for any upcoming IPOs, but it’s definitely interesting to know where I can look for the newest offerings.

Investing

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