IPO stands for Initial Public Offering. The Initial Public Offering is the first time a company begins to offer stocks to the public; it is also called “going public.” Normally companies will begin offering stock options to their employees and close affiliates and customers, which helps set a tone for how future trading will proceed. Once the company has gone public common stock can be traded to those outside the company as well.
An IPO is often made by a company fairly early on, when its financial needs are increasing. Those who purchase stocks from the company are investing into it, and the money they spend allows the company to expand, make needed purchases, and can contribute to other operating funds. The IPO is considered to be a form of external financing, since the money obtained by the company comes from outside.
Going public can be a complicated endeavor. Investors naturally hope to receive a return on their investments. Public Relations and other factors can contribute, positively or negatively, to the value of the stocks. If the company reports recent high earnings the stock value may increase, while poor earnings or news of bad decisions made by the company’s chief partners or management could have drastically bad effects on stock prices, with investors selling off quickly. An additionally complication is that the investors will expect to be able to extend their voices into the company’s decision processes, thus resulting sometimes in some loss of control for the company’s higher ranking executives.
In many cases, in order to coordinate its efforts when making an IPO, a company may hire an investment bank or other firm with expertise in such areas as stocks and investments, giving it a better chance to be successful in the market.
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