What is an Initial Public Offering (IPO)?
An Initial Public Offering, or IPO, is when a private company sells shares to the public for the first time, commonly referred to as "going public." The IPO-issuing company becomes publicly traded by offering shares on a stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq.
Private companies go public for a variety of reasons, the main one being to raise capital to reinvest and grow the business.
IPO basics: What investors should know
An Initial Public Offering (IPO) refers to when a private company becomes a public company by issuing stock to the general public for the first time. This involves working with an investment bank to underwrite and manage the stock issuance. Before a company can go public, it must file a detailed Tooltip with securities regulators, providing comprehensive financial information to potential investors.
It is important to note that IPO-issuing companies lack a trading history in the public markets and may not have extensive historical financial results. Investors are advised to approach these opportunities with a cautious and well-informed perspective, carefully evaluating the company's current financial health and future growth potential.
Clients interested should be aware that investing in an IPO involves significant risks. In order to participate, you must have certain investment objectives, sufficient investment knowledge and experience, and meet a minimum liquid net worth threshold.
Frequently Asked Questions about IPOs (Initial Public Offerings)
IPO stock refers to equity shares of ownership in private companies that become available to the public for the first time through an Initial Public Offering (IPO). This process allows everyday investors to buy into a company's growth story as it transitions from private to public ownership, commonly referred to as "going public."
A company uses an IPO (Initial Public Offering) to raise capital for growth or expansion, to pay off debts, or to increase market visibility. Going public also gives the company access to a larger pool of investors and provides liquidity for early shareholders.
Interested clients should be aware that investing in an IPO involves significant risks. In order to participate, you must have certain investment objectives, sufficient investment knowledge and experience, and meet a minimum liquid net worth threshold.
IPOs are far more common than direct listings (DPOs). IPOs are the primary method companies use to raise capital through a public offering, whereas DPOs are a more niche and less established alternative.
What is a Direct Public Offering (DPO)?
A DPO, also known as a direct listing, is a way for companies to become publicly traded without a bank-backed initial public offering (IPO).
Instead of raising new outside capital like an IPO, a DPO enables a company's employees and investors to convert their private ownership into publicly traded stock. Existing investors can cash out unrestricted stock at any time without the "lockup" period of traditional IPOs.
DPO basics: What investors should know
DPOs are an alternative to IPOs in which a company does not work with an investment bank to underwrite the issuing of stock. Although forgoing the services of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potentially volatile market swings.
When a company directly lists on the open market, clients have no eligibility requirements or forms to fill out. The only requirement is to have sufficient capital in your account to purchase stock.
Once the stock is listed, shares can be purchased by the general public in the same way any other stock is purchased.
Comparing IPOs and DPOs side by side
Explore the differences between IPOs and DPOs
Comparing IPOs and DPOs
| Initial Public Offerings | Direct Public Offerings |
|---|---|
| Shares are offered before the market opens | Shares are offered directly to the public on the open market |
| Not all investors may have access to the listed shares at first | Everyone has access to the shares at the same time |
| The issuing company typically relies on an underwriter | The issuing company does not utilize an underwriter |
| The underwriter advises on the terms of the offering | The issuing company proceeds without underwriter assistance |
| Generally attractive for larger companies | Generally attractive for smaller companies |
| Process typically takes more time | Process is usually faster |
Participating in new issue stocks has unique drawbacks that can adversely affect your investment.
IPOs come with distinct challenges that can impact your investment, such as:
- IPOs often lack a prior market, which exposes investors to significant price uncertainty before the issue and potential price volatility after the new issue hits the market.
- Companies that issue IPOs are often smaller, newer, and lack operating history, making them riskier investments compared to more established publicly traded companies.
- If the company opts for a follow-on offering of additional new shares after the IPO, the value of your existing investment could be diluted, potentially reducing its overall worth.
DPOs also have unique drawbacks that can adversely affect your investment, including:
- Since DPO shares are offered directly on the open market, with the opening price subject to supply and demand, investors could be exposed to additional risks such as low liquidity, price volatility, and uncertainty.
- DPOs may not be required to provide the same level of information as IPOs and publicly traded companies, which can make it difficult to assess the health of the issuing company.
- Potential for immediate insider selling, as there may not be any lockup provisions.
- DPOs are typically issued by smaller, less-established companies with shorter operating histories and untested management teams.