Initial Public Offering - IPO

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What is an 'Initial Public Offering - IPO'

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.

BREAKING DOWN 'Initial Public Offering - IPO'

An IPO is also referred to as a public offering. When a company initiates the IPO process, a very specific set of events occurs. The chosen underwriters facilitate all of these steps.

• An external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts.

• Information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review.

• The financial statements are submitted for official audit.

• The company files its prospectus with the SEC and sets a date for the offering.

The Risk of Investing in an IPO

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data to use to analyze the company. Also, most IPOs are for companies that are going through a transitory growth period, which means that they are subject to additional uncertainty regarding their future values.

For more information, examine on the interesting journey from the pre-IPO stage to the final IPO placement in the primary market: The Road to Creating an IPO and Interpreting a Company's IPO Prospectus Report.

Example of an IPO

The rate of company IPOs often depends on macroeconomic factors as well as internal needs to raise capital. Through the first half of 2016, the amount of companies going public has declined, with total IPO value half of what it was through the first half of 2015. AdvancePierre Food Holdings Inc., a national sandwich and snack producer based in Ohio, announced the initiation of its IPO process on July 5, 2016.

The company is issuing roughly 11 million shares of its own common stock, and current shareholders are selling just over 7.5 million shares of common stock. Public offering price per share is expected to be around $20, raising total funds of around $400 million. Underwriters include Barclays, Credit Suisse and Morgan Stanley.