initial public offering is the first time a private company issues
An initial public offering is the first time a private company issues stock to sell to the public.
The process is known as IPO for short, and sometimes simply as public offering.
An IPO is often undergone by younger an smaller companies looking for capital to expand with, although some large privately-owned companies may also look to enter public trading.
When a company becomes publicly traded, it most often issues new shares.
This dilutes the value of the current shareholders, however, the hope is that the investment of capital will bring about higher value to their shares in the long term.
Initial public offerings can be risky. There is normally little historical data off of which to judge the company issuing the IPO.
Additionally, the first day of trading can greatly alter the value of the stock in question.
Moreover, since the companies conducting IPOs are frequently in a growth or transition period, there is yet another variable to consider in the value of their shares.
Historically, many IPOs have been underwritten, that is, under priced.
This leads to an opportunity for investors to buy at the offering price, and quickly flip the stock once it gains value.
On the other hand, this costs the company capital which could have been brought in through a higher IPO price. Auctions have become one method of attempting to hold back underwriting.