What is an IPO?

An IPO is an initial public offering, in which a private company raises capital on public markets by offering equity in the company via shares. Once an IPO is completed, shares of the company are listed on public markets (like the Nasdaq, NYSE, etc.) and can be purchased and sold by the general public.

The goal of an IPO is to raise capital and sell equity via public markets. The benefits are that the company can typical raise a substantial amount of capital and insiders and larger stakeholders in the private company can more easily sell some of their position to the public.

There are currently two ways in which a company can IPO (almost three now if you distinguish SPAC mergers as a new strategic way to IPO).

Direct Listing

The company lists directly on public markets without spending millions on underwriters via banking institutions (most commonly Morgan, Goldman, Chase, BAC, etc.). The most significant examples of successful direct listing are Palantir & Spotify. Both of these companies listed their offering directly on the market and had successful IPOs. This process

IPO via Banking Institutions

The method is much costlier for the company going Public, but it has some supposed benefits (although those are becoming much less apparent as of late). The company typically pays underwriters to find a fair valuation for the stock price, this in term means that the company going public is leaving “less money on the table” since the IPO price is bettered valued than it might be otherwise. If the company is up a significant percentage on the first day of trading (100%+ or more), the underwriters likely did not do a good job accounting for the demand of that particular security. This is the case, since a lot of money was left on the table.

Typically, you always needed to be an accredited investor to buy a stock Pre-IPO however there are some brokerages now offering it to their customers like Robinhood. Otherwise, you can buy an IPO as soon as it is listed on a public market.

You should invest in an IPO if you believe that the stock will be good bet in the long term (the same way you would gauge any other potential investment). Investing has become much more popular in recent years. So much so that consumers have been actively weighing the decision to save vs. invest much more heavily than they have in previous years. These are all considerations that we can need to make when deciding how much to allocate towards an IPO.