Initial Public Offering

What Is An IPO?

Initial public offering or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges.

IPO shares of a company are priced through underwriting due diligence. When a company goes public, the previously owned private share ownership converts to public ownership and the existing private shareholders’ shares become worth the public trading price. Share underwriting can also include special provisions for private to public share ownership. Generally, the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting. Private shareholders may hold onto their shares in the public market or sell a portion or all of them for gains.

An IPO comprehensively consists of two parts. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest. 

Popular IPO Investment

Didi

Uber Of China
  • 56.0B Last Valuation
  • 4.0B Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Softbank, Apple, Tencent, Alibaba

Airbnb

World's largest vacation rental website
  • 31.0B Last Valuation
  • 445M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Google, JPMorgan, Sequoia Capital

SpaceX

Space tranportation manufacturer
  • 21.5B Last Valuation
  • 450M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Google, Founders Fund, DFJ

Wish

Cross border e-commerce platform
  • 8.5B Last Valuation
  • 250M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • JD Capital, Founders Fund,Temasek

Didi

Uber Of China
  • 56.0B Last Valuation
  • 4.0B Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Softbank, Apple, Tencent, Alibaba

Airbnb

World's largest vacation rental website
  • 31.0B Last Valuation
  • 445M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Google, JPMorgan, Sequoia Capital

SpaceX

Space tranportation manufacturer
  • 21.5B Last Valuation
  • 450M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • Google, Founders Fund, DFJ

Wish

Cross border e-commerce platform
  • 8.5B Last Valuation
  • 250M Last Round Funding
  • INSTITUTIONAL INVESTORS
  • JD Capital, Founders Fund,Temasek

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Investing in IPOs

When a company decides to raise money via an IPO it is only after careful consideration and analysis that this particular exit strategy will maximize the returns of early investors and raise the most capital for the business. Therefore, when the IPO decision is reached, the prospects for future growth are likely to be high, and many public investors will line up to get their hands on some shares for the first time. IPOs are usually discounted to ensure sales, which makes them even more attractive, especially when they generate a lot of buyers from the primary issuance.

Initially, the price of the IPO is usually set by the underwriters through their pre-marketing process. At its core, the IPO price is based on the valuation of the company using fundamental techniques. The most common technique used is discounted cash flow, which is the net present value of the company’s expected future cash flows. Underwriters and interested investors look at this value on a per-share basis. Other methods that may be used for setting the price include equity value, enterprise value, comparable firm adjustments, and more. The underwriters do factor in demand but they also typically discount the price to ensure success on the IPO day.

It can be quite hard to analyze the fundamentals and technicals of an IPO issuance. Investors will watch news headlines but the main source for information should be the prospectus, which is available as soon as the company files its S-1 Registration. The prospectus provides a lot of useful information. Investors should pay special attention to the management team and their commentary as well as the quality of the underwriters and the specifics of the deal. Successful IPOs will typically be supported by big investment banks that have the ability to promote a new issue well.

Overall, the road to an IPO is a very long one. As such, public investors building interest can follow developing headlines and other information along the way to help supplement their assessment of the best and potential offering price. The pre-marketing process typically includes demand from large private accredited investors and institutional investors which heavily influence the IPO’s trading on its opening day. Investors in the public don’t become involved until the final offering day. All investors can participate but individual investors specifically must have trading access in place. The most common way for an individual investor to get shares is to have an account with a brokerage platform that itself has received an allocation and wishes to share it with its clients.

The Worlds Largest IPO's

  • Alibaba Group (BABA) in 2014 raising $25 billion
  • Softbank Group (SFTBF) in 2018 raising $23.5 billion
  • American Insurance Group (AIG) in 2006 raising $20.5 billion
  • VISA (V) in 2008 raising $19.7 billion
  • General Motors (GM) in 2010 raising $18.15 billion
  • Facebook (FB) in 2012 raising $16.01 billion

Performance

There are several factors that may affect the return from an IPO which is often closely watched by investors. Some IPOs may be overly-hyped by investment banks which can lead to initial losses. However, the majority of IPOs are known for gaining in short-term trading as they become introduced to the public. There are a few key considerations for IPO performance.

Waiting Periods

Some investment banks include waiting periods in their offering terms. This sets aside some shares for purchase after a specific period of time. The price may increase if this allocation is bought by the underwriters and decrease if not.

Flipping

Flipping is the practice of reselling an IPO stock in the first few days to earn a quick profit. It is common when the stock is discounted and soars on its first day of trading.

Biggest First Day IPO Gainers

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