Ever wonder how the greatest companies like Apple, Tesla, and Facebook were able to trade on the stock market? It’s through a process called an IPO (Initial Public Offering)!
Simply put, an IPO is the process of a private company opening its shares to public investors. Typically, most companies that conduct an IPO are newer companies call startups. However, some mature and older companies do conduct IPOs if they were previously privately held.
Companies IPO for a variety of reasons. However, most companies IPO to raise capital to finance their businesses. By selling new shares, the company collects cash proceeds, net of any advisory and transaction fees.
There are two major stock exchanges in the United States: The New York Stock Exchange and the Nasdaq. Whenever a company decides to go public, management must decide which exchange they want to list their shares.
Before a company completes its IPO, management conducts what’s called a “roadshow.” Roadshows are management’s way of drumming up interest in the company and increasing the IPO’s probability of success.
On the day of the IPO, the stock will officially begin trading. It is common for companies to see rapid increases in their stock prices on the first day of trading as demand for shares is high.
In fact, Doordash, Airbnb, and Roblox soared 85%, 122%, and 54%, respectively, on their first day of trading!
Investing in IPOs is generally riskier than investing in companies that have been public longer, primarily due to uncertainty around the newly public company. As always, it is important to conduct due diligence before making any investments.