What is an initial public offering (IPO)?

An initial public offering, commonly referred to as an IPO, occurs when a private company first sells shares of its stock to the public. During this process, the company becomes a publicly traded entity, with ownership shares listed and traded on a stock exchange.

Join us on this blog as we explore initial public offerings, their history, how they work, benefits and drawbacks, IPO investments, and more. Let’s begin!

What does IPO mean?

An IPO refers to the first public sale of stock in a company. Before an IPO, a company privately holds its shares, which are not actively traded on a major stock exchange.

The IPO allows a private company's owners to sell some or all of their shares to outside investors, generating capital for the company while providing a way for early stakeholders to monetize their IPO investments.

After going public, the company becomes obligated to disclose financial information quarterly and annually to comply with regulations.

History of IPOs

The earliest documented IPO took place in the Dutch East Indies in 1602, when the Vereenigde Oost-Indische Compagnie (better known today as the Dutch East India Company, or VOC) became the first company in history to issue shares and bonds to the public.

The number of major IPOs in the United States increased significantly after the New York Stock Exchange in 1792 and the NASDAQ in 1971. Notable IPOs throughout history include Ford (1956), Disney (1940), Microsoft (1986), and Google (2004).

How does an IPO work?

The IPO process usually takes around 6 months and involves investment banks, lawyers, and auditors. The SEC reviews and approves the registration statement before trading begins.

First, the company works with an investment bank to determine valuation and draft an S-1 registration statement that discloses risks.

Next, the pre-IPO "roadshow" allows management to pitch prospective investors. Then, the underwriting bank purchases shares at a discount and resells them at the offering price on the exchange. The proceeds, minus fees, go to the issuing company.

To recap the IPO process, the company:

• Files its S-1 registration with the SEC.
• Conducts due diligence with lawyers and auditors,
• Price shares with investment banks,
• Participates in a publicity roadshow,
• Lists on an exchange,
• Underwriters distribute shares to the public at the offering price.

Pros and cons of an IPO

Major IPO benefits include accessing new capital for growth without debt, providing liquidity for early investors, and increasing prestige and brand visibility.

However, IPOs also introduce regulatory requirements and quarterly reporting. Approximately 20–30% of companies trade below their IPO price in the first year, as going public involves risk. Listings also attract public scrutiny.

What is the purpose of an initial public offering?

The primary aim of an initial public offering is to raise capital for expansion by selling company shares to outside investors. An IPO gives the issuing company funds to hire more employees, develop new products and services, acquire other businesses, repay debt, or invest in marketing and infrastructure.

Additionally, it provides early investors with an opportunity to realize financial returns and existing entrepreneurs with cash to reinvest. You can also check out “Initial Coin Offering”, “Security Token Offering”, and “ICO vs. STO” to learn more about fundraising and its effects on the crypto industry.

The performance of an initial public offering (IPO)

Underpriced IPOs, where the offering price is set too low, tend to experience the largest price increases on the first day of trading, according to academic research. However, long-term performance varies significantly depending on company fundamentals and market conditions.

On average, approximately half of newly public companies trade below their IPO price after one year. Between 1999 and 2019, the average 5-year return of IPOs was 10.7%, compared to market returns over 20%.

Can anyone invest in an IPO? Is an IPO a good investment?

Most retail or individual investors are unable to participate directly in IPOs because investment banks reserve the bulk of IPO shares for their large institutional clients.

However, anyone can invest in IPO stocks after trading begins on the public exchange. Brokerages may also offer a limited number of shares to loyal individual customers.

In the long run, IPOs have outperformed the overall market on average. However, there is significant risk involved. Not every IPO succeeds, and short-term performance varies widely.

Proper analysis of business fundamentals, industry dynamics, competitive advantages, use of proceeds, and valuation are important factors in assessing the viability of any particular IPO opportunity.

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Investing in an IPO: how is it priced?

During the IPO process, investment banks work with issuing companies to determine the optimal price that balances raising sufficient capital while minimizing unsold shares. They analyze comparable company valuations, forecast future performance, and gauge investor demand through the roadshow.

The final IPO price usually represents a discount to the anticipated post-IPO trading value, tempered by the retention of investor interest. The euro stablecoin EURK assures its peg and mitigates pricing volatility.

After an IPO, the stock begins trading openly on markets like the NYSE or NASDAQ. Investors can research fundamentals and set buy or sell limit orders through their broker, just as they would for existing publicly traded firms.

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IPO alternatives

Some companies raise capital privately via methods like venture capital, private equity, or angel investments. Others may pursue a direct listing, which does not issue new shares or raise cash but provides existing shareholders with a public venue to trade stock.

Mergers or acquisitions can also help companies gain access to new capital or technologies. However, an IPO remains one of the primary paths for startup founders and early investors to monetize their holdings while enabling further corporate expansion.

The bottom line

Initial public offerings provide a significant opportunity for private companies to access growth funding, provide liquidity to shareholders, and allow new investors to enter a business at an early stage.

IPOs, when done prudently with the correct valuation, have historically delivered sizable returns over the long run. A euro stablecoin platform, like EURK, provides a trusted alternative investment, empowering transparency and reliability.

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