What Are Initial Public Offerings and Why Are They So Important?

initial public offering

When it comes to investing on the stock market, you can’t buy shares in just any company. Only publicly traded companies on a stock exchange can be purchased by anyone willing to invest. All other companies are considered privately owned and have nothing to do with the stock market.

Yet those private companies don’t always stay private forever. They can join their public big brothers on the stock exchange of their choice by filing an initial public offering, or IPO. This helps them sell shares of their stock, raise money, and (hopefully) grow well past their current capabilities.

How do stocks go from private to public with an IPO?

A company can’t just go from private to public overnight. To be listed on a major stock exchange, they must follow a strict set of procedures and guidelines. They also need help from outside financial firms to accomplish their goal.

The good folks at Wall Street Survivor put together this helpful video about the IPO process. To see how the IPO process works and what it means for you, the budding investor, pay attention to the following steps. They could help you “get in on the ground floor” of the hottest new stock.

Should I invest in a company’s IPO?

That depends. If you think a private company will benefit from the stock market and increase in value, you might want to invest in that company when they go public. For instance, if you invested in Amazon ($AMZN) around the time the company went public, your initial investment would now be thousands of times larger than before.

Some IPOs look good on paper, but the value of that stock decreases over time. Original Twitter ($TWTR) investors paid around $26 per share when the company first went public. As of this writing, the company is worth $18.31 per share. The people who bought the company when it went public lost nearly $8 a share.

Simply put, invest in a company’s IPO if you’re all but certain about their stock’s potential future growth. If you feel the company might have some significant road blocks in their stock market success, you could always wait to invest later.