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What is an IPO and how to go about investing in it?

An initial public offering (IPO) occurs when a company first sells common shares to investors in the public. Generally, the company offers primary shares this way, although sometimes secondary shares are also sold as IPOs. This article contains:
  • What are the eligibility criteria for a company to issue an IPO?
  • Why companies go for IPO?
  • Why IPOs are said to be attractive for investors?
An initial public offering (IPO) occurs when a company first sells common shares to investors in the public. Generally, the company offers primary shares this way, although sometimes secondary shares are also sold as IPOs. For a company to offer IPOs, they need to hire a corporate lawyer as well as an investment banker to underwrite the offer. The actual sale of the shares is generally offered by stock exchange or by regulators. When the company starts to offer IPOs, they are usually required to reveal financial information about the company so that investors know whether the companies a good investment or not.

Being able to answer the question what is an IPO? And knowing what IPO stands for is important if you're going to be investing in stocks or companies. Once you understand the definition of IPO and of stock market IPO, you can begin learning how to use this investment opportunity to make a profit. Initial public offerings make a good opportunity to make a profit because they are so inexpensive. In fact, many of the dot com millionaires of the 1990s made their money simply through IPOs.

Why Do Companies Offer IPOs?

In general, companies offer IPOs in order to raise money that they need for business expansion and new business opportunities. By offering shares to investors, a company stands to bring in a lot of money. They can then use this money to grow their business. The more their business grows, in turn, the higher the share prices grow and the more money is generated by investors purchasing shares. Unlike business loans, which need to be repaid with interest, IPOs do not have this disadvantage. It is investors who take the risk -- although also a potential gain -- buying shares. If the company loses money and they will not have to repay their investors, although investors in general demand high accountability from a company they are buying stocks from.

Many companies simply see offering IPOs as the next stage in business growth. Since public companies often enjoy larger profits and can draw on a larger capital base than private businesses, IPOs seem like the logical way to grow a company for many CEOs.

Who Can Join the IPO Program?

Public investors can purchase IPOs through their regular investment channels, although they will need to act fast to take advantage of the initial low IPO costs. Businesses can take advantage of IPOs simply by offering public shares on the market. To do this, they require a corporate lawyer, transparent business and financial practices, and an investment banker. They also need a medium -- usually a stock exchange -- to actually sell the shares. Most businesses additionally hire marketers or someone who can advertise or market the stock.

What are the Benefits of IPOs?

For businesses, stocks and shares are a fast way to raise revenue for business expansion and growth. They also can take a business to the next level. By becoming a publicly traded company a business can take advantage of new, larger opportunities and can start working towards incorporation and even worldwide expansion. IPO gives a company fast access to public capital. Even though public offering can be costly and time consuming, the tradeoffs are very appealing to companies. IPOs are also a relatively low risk for businesses and have the potential for huge gains and for huge opportunities. The more investors wish to invest in a company, the more the company stands to or from IPOs and other stock offerings.

For the investor, IPOs are attractive mainly because they may be undervalued. Initially, to make IPOs more attractive, many companies will offer their initial public offering at a low rate. This helps to encourage investors, and investors will often buy IPOs, thinking that the new company or the newly public company will be the next big thing with a huge profit margin. As prices grow and demand for the IPOs grows, early investors stand to make a lot of profit -- and very quickly.

If you hope to invest in companies, understanding the answer to the question what is an IPO? is essential to your success. An initial public offering, the first time a company offers shares to the general public, is a great way to start building profit. Since IPOs are in some cases undervalued they can often be sold with it a short period for good profit.

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article courtsey @ estockwise.com