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Published on: May 24, 2024
#Financial Markets
An initial public offering (IPO) is the process by which a private company becomes publicly traded by offering its shares to the public. The model has existed since the 1600s. How does an IPO work?
➔ An initial public offering (IPO) allows a private company to raise capital for expansion and become a publicly traded company, which increases its financial support and potential for growth.
➔ Retail and institutional investors can participate in initial public offering stocks at a very early stage of public trading.
➔ While not all IPOs are as monumental—billions in Saudi Aramco and Alibaba—they often help reshape industries.
➔ Investor tastes are changing, and the tech sector, focusing on AI, is set to dominate future IPOs.
➔ Initial public offerings also present challenges, including regulatory compliance, high cost and demanding reporting requirements, impacting what is ipo shares.
Necessary funds are critical for a company to survive and thrive. Therefore, every company’s journey involves backers and investors, which are often drawn by an IPO. What is IPO or initial public offering?
An IPO is a massive step in a company's journey—it is the first time the shares are offered to the public, allowing ordinary investors to participate in the company's potential success. This critical event can cause the market to be very excited, just like the noise that was made for Reddit's recent IPO, where the social media giant became one of the world's most watched public companies.
This article discusses what IPO is, how IPO works, how to invest in IPO, and the top 10 IPO investments of all time.
IPO is how a private company that is not listed publicly becomes publicly traded by offering its shares to the public. Imagine this: you and four of your friends start a tractor-manufacturing business with a starting capital of $50,000. With the business going on well, you decide to enlarge it.
However, you require more money than your small group can provide. You decide to raise funds from many public investors by going public through an initial public offering or IPO. Here's what an initial public offering would mean for your business:
① It helps your business to get the necessary funds from the public market.
② It changes your company's status from private to public, thus spreading its financial base and potentially increasing its credibility.
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A company usually goes public when it already has a solid financial record or strong market position, profitability, growth potential, and more. Companies with good potential may go public at different valuations depending on their financial health and market potential.
The procedure starts with the company choosing underwriters–usually investment banks–to assist in the transition, including determining the company value and share price, complying with the regulations, etc. The relevant authority (e.g., the U.S. Securities and Exchange Commission) has to review and check the company's IPO proposal, ensuring all the financial disclosures are correct and that the company satisfies all the regulatory requirements.
Once the company gets the approval, it can sell its shares on the stock market, which will be available to institutional and retail investors. This stage is critical since it shows how many shares will be and at what price, showcasing the public’s interest in the company. A successful IPO launch can boost the company's capital and credibility and help the firm grow and expand further.
IPOs allow companies to attract more investors and allow investors to participate in a company before it launches in the market.
Since their existence, global markets have expanded, and companies have been using IPOs to raise capital. The first IPO was issued by the Dutch East India Company, also known as Vereenigde Oost-Indische Compagnie, and it started the modern financial phenomenon of the initial public offering. Below is a closer look at the top 10 IPO stocks that have made a lasting impact globally.
The Saudi Aramco, also known as the Saudi Arabian Oil Company, went public on the Saudi Stock Exchange in December 2019 and raised about $29 billion. A public issue of this size was a turning point for the international finance community, as this was the biggest IPO of the time.
Alibaba used to be the largest IPO before Saudi Aramco. In September 2014, it became a public company on the New York Stock Exchange, and it raised $25 billion, becoming a major player in the e-commerce industry and setting a high bar for other companies that want to go public in the future.
SoftBank, a telecommunications giant, managed to collect more than $21 billion through its IPO in December 2018 and was listed on the Tokyo Stock Exchange. This crucial fresh primary was the major cause of the company's technology investments in many parts of the world.
Also Read: Revisiting the Global Financial Crisis
In October 1998, the NTT Mobile Communication Network was listed on the Tokyo Stock Exchange with a capital of $18 billion. This public offering was a turning point for the company, allowing it to expand its cellular services throughout Japan.
During the Global Financial Crisis in March 2008, Visa was listed on the NYSE and received over $17 billion. This smart decision is why Visa is now a top company in the financial services industry.
The AIA Group, a financial services company from Hong Kong, is the world's largest initial public offering of the year and raised about $18 billion in its IPO on the Hong Kong Stock Exchange. The key to the fast-rising of its growth in Asia was funding.
In 1999, the Italian power company Enel SpA earned over $16 billion from its IPO on the Borsa Italiana. The money was crucial for renewing its infrastructure and extending its renewable energy projects.
Meta was just Facebook, which initially got $16 billion in its IPO on Nasdaq in 2012. The raised capital was critical to the company’s growth and development of social media technologies.
General Motors returned to the market with a massive bang in 2010 after the reorganisation under bankruptcy protection; it raised $16 billion in its IPO on the NYSE. This allowed GM to rise from bankruptcy and create new products.
In 2006, the Industrial and Commercial Bank of China raised $14 billion in a dual listing on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. This IPO was the moment when ICBC became a world-class bank.
These IPOs changed the companies and their industries and greatly affected the global financial markets, thus showing the mechanism of public investment and corporate growth.
IPOs are the turning point for companies to raise the funds they need and for investors to participate in the company's growth, but the process is complete with both big advantages and big challenges. To navigate these waters, one must be familiar with both sides to maximise the opportunities or minimise the risks.
• Capital Acquisition: IPOs are instruments for companies to raise the required funding for further development, research, and debt payment.
• Investment Opportunities: IPOs allow traders and investors to diversify their portfolios and potentially find new and profitable stocks.
• Transparency and Visibility: The compulsory quarterly performance reporting informs investors about the company's financial situation, helping them make the right choices.
• Increased Expenses: Going public is costly, as companies have to face legal, accounting, and marketing expenses that may reduce the initial capital raisings.
• Regulatory Compliance: The fear of violating regulations is always on the horizon, and it is caused by the strict observance of rules and regulations that are hard to follow.
• Demanding Reporting Requirements: The continuous demand to generate detailed financial reports is the primary source of the time and resources taken from fundamental business activities.
A March 2024 EY report clearly shows the present condition of the global IPO market. George Chan, EY Global IPO Leader, said:
"In 2024, the IPO market participants are going to face a new world that is completely different because of the new investor preferences that are now in favour of the proven profitability in the midst of the changing interest rates, the complex geopolitical dynamics, and the rising influence of AI,"
• Market Worldwide: The worldwide IPO issuance was reduced by 7% in the first quarter of 2024, a sign of investor caution.
• Capital Raised: Despite fewer IPOs, the market still raised 287 deals, for a total of $7 billion in the first quarter.
• Sector Highlights: The sectors with the most IPOs were the Industrial, Consumer, and Technology sectors.
• Regional Trends: Japan features IPOs because of its stock market performance, which is a trend in Europe and the Middle East. On the other hand, the US, ASEA, and India have had stable trends.
• Future Outlook: The forecast states that the AI sector will see many initial public offerings. This means that the tech industry will be the main driver of IPOs.
An IPO is a big event for a company and a perfect opportunity for investors ready to invest in its future. However, mixing excitement with careful analysis and understanding that every investment has risks is essential. We advise you to thoroughly investigate the company's basic market position and buy an IPO that suits your financial goals, investment strategy, and risk tolerance.
An IPO, or initial public offering, is a fundraising method in which a private company makes its shares available to the public for the first time.
The initial offer of an IPO is the first public price of a company in the open market.
Companies go public to increase visibility, raise capital, and use public markets to increase their economic core.
IPO investment gives you early access to a company’s shares, growth potential, and the opportunity to diversify your existing portfolio.
When investing in an IPO, some risks include market volatility, unknown earnings in the future company, and possibly an overvaluation relative to the company’s earnings after the initial offering call for caution.
Underwriters determine the IPO price based on factors such as the company’s financial stability, market conditions, and investor demand.
This is how an IPO works: The underwriters and investment banks help the company prepare for the IPO, set the initial share price, and ensure compliance with securities laws before making it available to investors.
Some of the biggest IPOs, such as Saudi Aramco, Visa, and Alibaba, have raised billions of dollars and changed their industries.
An IPO increases accountability and transparency through regulatory demands and regular disclosures of a company’s financial performance.
Investors are interested in technology, and the sector is expected to lead upcoming IPOs in AI and digital innovation companies.
A reverse IPO allows a private company to go public by merging with an already listed company, avoiding the traditional IPO route.
Initial public offering stocks offer early access to promising companies, allowing investors to capitalise on growth opportunities.
Pre IPO investments provide an opportunity to purchase shares before a company goes public, often at a lower valuation.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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