What is an IPO?

Cheat Sheet:

  • IPO stands for initial public offering.
  • It is when a company first sells its stock to the general public.
  • In an IPO, a stock begins trading on a stock exchange like the NYSE or Nasdaq.

When a company is young, its owners are usually a small group of people that have a connection to the company (founders, employees, and investors).  The company’s stock is  “privately held.”  Most companies stay that way, but some grow to the point where they sell shares in the company to the general public.  This is called an IPO, or initial public offering.

Companies go public for a variety of reasons:

    • To use the money from the IPO to hire more people and build more products.
    • To avoid taking a bank loan (the company doesn’t pay back the money from an IPO).
    • To enable some of their early investors and employees to cash out
    • To have the prestige of trading on a stock exchange.

Going public is an involved process that takes months. The company hires an underwriter (a big Wall Street firm like Goldman Sachs or Morgan Stanley) to help them sell the shares. They work together to decide how many shares to sell, determine how much to charge for each share, and find an initial set of buyers for the shares.  

The underwriter does a “road show” before the IPO to drum up interest in the shares being sold.  The final IPO price is set the night before the company goes public.  The day of the IPO, the CEO and other key employees often ring the opening bell at the stock exchange. It’s an exciting day for the company.

Here’s a rundown on the Apple and Facebook IPOs:

Company Name IPO Date # of Shares Sold Price Per Share Amount Raised in IPO
Apple 12/12/80 4.6 million $22 $101.2 million
Facebook 5/18/12 421 million $38 $16 billion

Note:  This isn’t the total number of shares Facebook or Apple has. It’s just the number of shares that were sold in the IPO.  Other shares are owned by insiders (early employees and investors) or were sold to the public in follow-on (secondary) offerings.

Ironically, the general public doesn’t get to buy the stock at the IPO price even though it’s referred to as the initial public offering.  It’s mostly Wall Street insiders who get the IPO price.  The general public has to wait until the stock begins trading on the stock exchange the day of the IPO, and the price we get is whatever the market price is, based on supply and demand for the stock that day.

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