Many times we watch the business news or read the finance section of the newspaper and see that an Initial Public Offering (IPO) is due on the market, but how many of us actually know what an IPO is?In layman’s terms, it is a company’s offer to the public to purchase shares in that company in order to raise capital and then list on the general stock market for the first time.
Also referred to as ‘going public’, details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus.
But even though a company may present an IPO, there are no guarantees that it will be successfully listed. Sometimes companies do not meet the expected capital target and therefore will not proceed in listing on the market.
For a better understanding, if ABC company wanted to raise $1 million but got only $900,000, then they would not be listed on the stock market, and the investors would be refunded.
That is why it is very important to choose reputable underwriters and promote the IPO to get the attention. Therefore, before a company does an IPO, it is considered a private company primarily made up of early investors such as friends, family members, venture capitalists, etc.
The truth behind a company’s decision to go public is this: Money needs to be raised for company expansion. But why not just borrow the money and keep the company private?