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A Guide to the Initial Public Offering Process

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Why Use A Guide to the Initial Public Offering Process?

Guide to the Initial Public Offering ProcessTo provide investors an advantage during the Initial Public Offering (IPO) process, which involves private companies in the process of becoming publicly traded companies, it is useful to have a guide to the initial public offering process.  Many investors shy away from investing in stock IPOs because they do not understand the IPO process and all the various aspects and market forces that affect stock IPOs.  Using a guide to the initial public offering process, investors can develop an understanding regarding the IPO process that will assist them in making decisions regarding whether or not to buy a stock IPO.

In many ways, the IPO process is the ultimate Wall Street insider’s game, which is why it is critically important that individual investors understand the stock IPO process before investing in IPOs.  While having a guide to the initial public offering process does not put individual investors in the same position as Wall Street insiders, it does provide them the knowledge they need to decide whether they would like to participate in IPOs.

A Guide to the Initial Public Offering Process

Private companies initiate the initial public offering process because an IPO allows them to sell shares to Wall Street investors, which in turn raises money for the company to address various corporate goals and needs.  The initial public offering process begins before an official IPO filing has been made public.  At this early stage, a private company approaches Wall Street investment banks, such as Goldman Sachs or JP Morgan, and strikes a deal by which the banks agree to underwrite and manage the IPO in exchange for a sales fee that is based on the ultimate size of the IPO.

Provided that there is sufficient investor interest in an IPO, the next step in the initial public offering process is for a private company to file an S-1 securities registration statement with the United States Securities and Exchange Commission (SEC).  The S-1 it the most critical document in the IPO process, as it provides investors a great deal of information about the structure of the IPO, the financial condition of the company proposing the IPO, and how the company intends to use the proceeds from the IPO.  Upon reading the S-1, many investors have enough information about an IPO to decide whether it is worthy of further consideration as an investment.  It is important that investors check for S-1 updates during the IPO process to assess whether conditions at the company proposing the IPO have changed.

The next to last step in the IPO process is when an IPO has been granted the green light to go forward both from the underwriters and the SEC, and the company proposing the IPO performs a  “road show” to meet with investors around the country to explain their reasons for doing an IPO and their corporate objectives after completing the IPO process.  This is the one opportunity that investors have to ask direct questions to upper management about an IPO.

The final step in the IPO process is when the IPO underwriters assess investor interest in an IPO and set a price for the IPO, which is the price investors that are allocated IPOs shares through their brokers will pay for the IPO shares just prior to the shares becoming publicly traded.  Some brokers, such as E-Trade, provide avenues for individual investors to participate in IPOs, so check with your broker early on in the IPO process to see if you can get an allocation of IPO shares before they are publicly traded.  The shares start trading on a public stock exchange within a day of the setting of the IPO price.

A guide to the initial public offering process would not be complete without a few words of advice.  IPOs are notoriously volatile and difficult to trade when they first start trading on public stock exchanges.  Extreme caution should be used when considering investing in an IPO soon after it is trading publicly.  It may be best to wait for an IPO to settle down and establish a trading range prior to investing in stock that just underwent an IPO.

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