Initial Public Offering
Initial Public Offering refers to the release of a company’s stock to the public market for the first time. The main reason why companies engage in IPOs is to obtain funds for expansion purposes. In most cases, the expansion planned is for a private to go to the global market. Before making the decision to engage in an IPO, there are various concepts that are to be considered. The factors that have to be decided upon before the IPO announcement are the type and price of the shares to be sold to the public. Since the IPO changes the trading private company into a public prospect, the investors in the company do not expect to be paid by the company after the IPO. This is because the funds have to pass through the open market for the public investors first. The law protects the now public company in this regards.
During the price fixing, only one individual, the lead manager referred to as the book runner apportions the price. This can be done through one of two ways i.e. through book building or through fixed pricing. In either way, the decision is based on the investor information. The share prices have to be based on the analysis of the investor data. The price settled upon can be either profitable or unprofitable. For instance, it the IPO for Globe.com, the shares were priced at $9 each. This fell short of market expectations despite earning an income of approximately $30million.
The expected market demand could have risen higher than $200 million for the company’s shares (Ghosh, 2010). On the other hand, overpricing of company shares during an IPO has the potential of resulting in the difficulty to sell. This may result in the deterioration of share worth and reduced marketability. This is what happened during Face book’s IPO in 2012.
Ghosh, A. (2010). Pricing and performance of initial public offerings in the United States. New Brunswick, NJ: Transaction Publishers.
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