5min read
Published on: May 24, 2024
#Financial Markets
An initial public offering (IPO) is the way a private company becomes publicly traded by offering its shares to the public. The model has been around since 1600s. How does an IPO work?
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 an 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 an IPO is, how it works, and the top 10 IPOs of all time.
IPO is the way 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 IPO investment.
Here's what IPO would mean for your business:
A company usually goes for an IPO when it already has a solid financial record or strong market position, profitability, growth potential, and more. Companies with good potential may go for the IPO at different valuations depending on their financial health and market potential.
Source: Freepik
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 both 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.
Did you know? The first IPO was issued by the Dutch East India, also known as Vereenigde Oost-Indische Compagnie, and it started the modern financial phenomenon of initial public offerings. Below is a closer look at the top 10 IPOs that have made a lasting impact globally.
Saudi Aramco: The Saudi Aramco, also known as the Saudi Arabian Oil Company, first 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: 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.
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.
Source: Freepik
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.
Pros | Cons |
Capital Acquisition IPOs are instruments for companies to raise the required funding for further development, research, and debt payment. | Increased Expense Going in public is costly as companies have to face the legal, accounting and marketing expenses that may lead to reduction of the initial capital raisings. |
Investment Opportunities ETFs allow traders and investors to diversify their portfolios, hoping to find potentially new and profitable securities. | Regulatory Compliance The fear of violating regulations is always on the horizon, and is caused by the strict observance of rules and regulations that are hard to follow. |
Transparency and Visibility The compulsory quarterly performance reporting informs investors about the company's financial situation, helping them to make the right choices.
| 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 global IPO market's present condition. 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,"
This summary indicates the most important trends and shows potential interest from investors and companies.
An IPO is a big event for a company and a perfect opportunity for investors who are ready to invest in its future. However, it is essential to mix excitement with careful analysis and understand that every investment has its risks.
You’re advised to thoroughly investigate the company's basics, market position, and buy an IPO that suits your financial goals, investment strategy, and risk tolerance.
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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