IPO or Initial Public Offering

What is an IPO? If you've spent any time investing, then you've likely heard the phrase "going public." That phrase refers to an IPO, also known as an initial public offering. IPOs play a crucial role in the operation of the stock market. They're how new companies are introduced to stock exchanges. They allow companies to raise large amounts of capital. They also give investors the opportunity to get in early on companies that they may find attractive. Not all IPOs are great deals, though. They're also not easy to invest in. Before you invest in an IPO, it's important that you understand everything involved.

Public companies vs. private companies

Knowing the difference between a public and private company is critical to understanding IPOs. Private companies are those that are owned by one person or a small group of individuals. Shares of the company aren't readily available to purchase. In fact, they may not be available at all. Since shares can't be bought on an exchange, private companies don't have to release detailed financial information. They also don't have to answer to a board of directors or to a large number of shareholders.

Some companies prefer to be private because of flexibility it provides. However, going public gives the company a way to raise large amounts of capital. When a company goes public through an IPO, it makes some of its ownership shares available for public investment. The capital raised from the IPO can then be used to help scale the company.

When a company does go public, it opens itself up to greater scrutiny. It must release quarterly and annual financial records. Those records may get heavy analysis from the financial media and from investment firms. The company must also answer to a board of directors and work cooperatively with possibly thousands of shareholders. While that may seem inconvenient, the possibility of raising millions - and maybe billions - of dollars often justifies those downsides.

Examples Of Tech IPOs

There have been many IPOs involving tech companies in recent years. Two of the most noteworthy are the Facebook IPO and the Twitter IPO. The two IPOs are great examples of how differently IPO outcomes can be.

Facebook stock price Vs Twitter stock price
Source: Facebook stock price Vs Twitter stock price by Amigobulls

Facebook went public in May of 2012 and opened right around $38 per share. It proceeded to drop nearly 50 percent in within the first four months because of a variety of concerns, including how the company could monetize the use of its mobile app. Since that time, though, most concerns have been addressed and the company's stock has rallied to nearly $76 per share, almost double the IPO price.

The Twitter IPO followed almost an exactly opposite trajectory. Twitter went public in November 2013 and Twitter IPO price was around $41 per share. As Twitter's user base soared, the share price increased to $69 per share in less than two months. After that high, though, questions arose about the company's monetization strategy and profitability. The stock now stands at around $35 per share, representing a substantial loss for those who have stayed in since the IPO.

Like all investments, IPOs require due diligence on the investor's part. They may get a lot of attention because they can be exciting. However, that doesn't necessarily make them great investments. Do your research before diving in.

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