What is an IPO?

A company selling its stock to the public for the first time is known as Initial Public offering. Initially they are sold in the primary market at an offering price determined by the syndicate. Following the financing the shares is traded in the secondary market also known as the aftermarket.

Investment bankers or underwriters assist

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to sell the stock in the primary market that helps in promoting the initial offering on what is known as a road show. Usually when an offering is branded hot, it is extremely difficult for the individual investor to obtain shares even if they participated in programs facilitated at e-syndicate brokerage houses because the, institutional heavy weights tend to obtain major part of the shares immediately. Eventually these shares are traded on the major exchanges. 75% of the IPOs trade on NASDAQ while the remainder either trade on the big board or on the American stock exchange.

Why a company goes public?

Typically a public offering is a marketing event for the company. Most companies that go public need additional capital to execute their long-range business plans, improve brand name and utilize the funds for possible acquisitions. This is typical for most of today's Internet and technology offerings. A company can always get back into the market to offer additional shares through a secondary offering.

IPO filings

Usually there are two types of IPO filings with the Securities and Exchange Commission an S-1 filing or an SB-2 filing.

The company needs to list what the proceeds from the offering are to be allocated for. Usually proceeds help pay down debt and in fund expansion.

Purchasing shares at the offering price

In the present day market it is very rare that a small investor purchases of an IPO at the offering price. But the small investor could maintain brokerage accounts with e-syndicate houses such as DLJDirect, E*Trade, Friedman Billings Ramsey.

Another to the typical e-broker is W.R.Hambrecht, pioneer of open IPO, a Dutch auction method of offering shares in IPOs. It is a widely successful procedure commonly used in the selling of treasury notes.

While these e- syndicate houses are significant, they are not full service brokers. The full service brokers include Goldman & Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley Dean Witter.

IPO investment strategies

Investments in an IPO are different to investing in seasoned stocks. There is a limited amount of information and research on IPOs prior to the offering. Research opinions coming from the underwriters are invariably positive, immediately after the offering.