Research Paper Sample on Initial Public Offering

Initial Public Offering

This refers to the sales of stock to the public by a private company for the first time. It is meant to raise money for expansion purposes. Large companies engage in an IPO activity in order to trade publicly in the globe market. Several activities are undertaken before coming up with a decision to indulge in an initial public offer. One of the activities is to settle on the type and the price of the security to offer. This practice changes a private company into a public venture. After the initial public offer, a company trading in the security exchange market is not required by law to pay money to investors because money passes through public investors in the open market.

Pricing Of Initial Public Offer

The entity appoints a book runner (lead manager) to apportion the right price of the shares to be issued. The pricing mechanism depends on the individual company where it may decide to go for fixed price method or book building. In the former, the lead manager looks at the confidential investor’s data and makes an analysis before pricing the shares. There are two outcomes from a pricing activity. One  reason is that the shares are often poorly priced. An example of a global company that underpriced its shares was globe.com. Shares were traded at a price of $9 each, which raised a total of $30million investment capital. This fell short of market demand that would have risen over $200 million in capital (Ghosh, 2010). The next outcome is overpricing which gives difficulties to the underwriters in selling the shares. These shares may deteroriate in worth and marketability. An example of a company that overpriced its shares is face book IPOs in the year 2012.

References

Ghosh, A. (2010). Pricing and performance of initial public offerings in the United States. New Brunswick, NJ: Transaction Publishers.