When investing in stock market, one of the common market terms you are likely to run into is “IPO”. IPO stands for Initial Public Offering, and it is the first (initial) sale of the stock by a company to the public.
There is a typical course of action that takes place for the company to go public and issue stock. First thing a company does when it wants to go public is to hire an investment bank, an underwriter. An underwriter is an interface between companies and investing public. The big names involved in the underwriting process include companies like Merrill Lynch and Morgan Stanley. Once the company and the investing underwriter negotiate the details, such as the type of stock to be issues (see above), amount of stock shares an underwriter promises to buy before reselling it to the public and so forth, the investment bank will create a registration to be filed with SEC. After SEC reviews the information and approves the offering, a date is set for the first public offering. Before the IPO release date a price is negotiated between the company and the investing firm (underwriter).
If underwriters believe that an IPO will be “hot”, they’ll first offer the stock to their favorite large institutional investors (i.e. Fidelity) and to active individual investors, who trade frequently. Most often, the only way for an average person interested in investing in IPO stock is to have a large account with one of the investment banks that have acted as an underwriter. In other words, your chances of getting early stock shares in an IPO are slim to none unless you’re on the inside, and if you get them it is probably because these are the unpopular ones.
It is when the IPO market is slow, individual investors can reap the best returns. This is because institutional investors demand low prices for their participation and individuals can benefit. Individuals can trade IPOs in the aftermarket online or via their traditional full-service brokers. The first several weeks of aftermarket trading are critical times for IPOs and often the stock jumps considerably in the beginning of its public life.
