Debt Dictionary


Investment Dictionary -> IPO

Initial Public Offering (IPO) is the first issue of company shares to the public. Usually, new entities aim at collecting sufficient capital in order to expand their operations. This act allows them to raise extensive capital and secure their sustainable growth. There are several benefits arising from a successful listing on the capital markets. Firstly, the IPO gives access to funding which helps in the completion of strategic mergers and acquisitions. Secondly, it offers an opportunity to expand businesses into new markets. Thirdly, the IPO enhances the perception of businesses and brands in the eyes of the customers, employees, and potential investors. For these reasons, some leading companies also opt for initial public trading. A justification is that the entities are not required, under existing legislation, to repay this capital. Rather than that, the investors are entitled to a portion of the profits and the right to participate in the distribution of capital if the company dissolves.

The IPO typically involves one or more financial institutions, or investment banks, which raise capital and trade with securities on the capital markets. The issuing company enters an agreement with the investment bank to sell its stock. The actual sale may be conducted in a variety of ways. For instance, the best effort contract mandates that the underwriter sells as much stock as possible at the agreed price. The all-or-none contract mandates that the investment bank sells the whole stock or the contract is considered void. Under the terms of the bought deal, the underwriter actually purchases the shares of the issuer. Typically, the issuer makes large discounts and the shares are easy to sell on the stock market. Under the firm commitment contract, the investment bank guarantees the sale of the whole issue at the negotiated price. This type of agreement is the riskiest for the underwriter and consequently, the most expensive for the issuing entity.

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