Initial Public Offering

IPO or the Initial Public offering is the first sale of stock by a private company to the public.They are usually issued by smaller, younger companies seeking capital to expand its operations. They are also done by large companies looking to become publicly traded.

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. However, this risky investment can fetch excellent results as well in a very short time.

The money paid by investors for the newly-issued shares goes directly to the company in contrast to a later trade of shares on the exchange, where the money passes between investors. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company.

A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. This is called the Issue price of the IPO. The most common method of issuing a IPO is though the book building process. The other method would be to fix a price by the company with the help of lead managers.

After the initial bidding of the IPO, the company issues the shares to successful bidders. This process takes about 15-20 days before it starts trading in the stock market. The initial day of trading usually sees a large fluctuation in the share value. This can used by traders for making profit.

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