The acronym “IPO” stands for “initial public offering”. An initial public offering is the first time that a private company offers its shares for sale to the public. Companies do this to raise money.
Usually, when you buy shares of a company, you are buying them from other people, not directly from the company. However, in the case of an IPO, the company is the seller of the shares.
IPOs tend to generate a lot of attention from the financial press and other media. This is because many IPOs mark a sort of rite of passage for exciting, growing companies. It is a way for companies to grow more quickly, and it gives individual investors the chance to take advantage of companies that are doing new and different things.
In general, shares in an IPO are priced to meet two objectives: generate money for the company, and allow those who buy the shares at the IPO price to make some money on the first day of trading. If the IPO price is too low and prices rise substantially on the first day of trading, it means that the company left money on the table. But if the IPO price is too high and shares fall or remain stagnant on the first day of trading, many people will flee from the stock, which could hurt the company’s ability to raise money later.
Finally, it’s worth noting that most companies that have an IPO also sell stock again later–it’s rarely a one-and-done kind of thing.
