What is an Initial Public Offering? IPO of Common Stock Explained

The following article will help a novice investor understand the basic concept of an "Initial Public Offering", why they are an important aspect of our financial markets and economy, who can participate by purchasing new issues, selling IPO's or "Flipping" shares immediately after the issue begins trading on the respective exchange in the after market, and a few other insights designed to provide the reader with a solid foundation of knowledge regarding this highly speculative segment of the stock market. Please read on, and always consult a financial professional before investing -

>> WHY IPO's?

When an existing privately held company reaches a crossroads in regard to the availability of working capitol for research, product manufacturing, brick and mortar expansion, or any other necessity to ensure the venture maintains a viable path toward growth and profitability, there are several potential financing avenues the owners(s) can pursue. One way to secure the needed funds is to convert and or transfer all or a portion of the company from private to public ownership by offering and ultimately issuing to participating investors and investment companies, undivided and equal units of equity called "Common Stock", or "Common Shares", or just simply "Shares".

The issuance of initial stock in a privately held company, which is subject to applicable registration procedure prior to distribution, typically results in the termination of absolute and unimpeded control by current ownership, and transfers these responsibilities into the hands of a new group of vested parties called "Shareholders" who have purchased common stock and the attached inherent voting rights.

Stocks are typically considered liquid investments and shares constantly trade hands on the tangible open out cry or computerized "Virtual" exchanges, so the demographic makeup of owners at any given time is fluid and subject to continuous change. Depending on a company's overall performance which ultimately dictates the underlying stocks long term price trend, the original founders may indeed continue to run the day to day operations and manage the venture like many successful Silicon Valley entrepreneurs of the 1980's and 1990's have done, and continue to do so. However, once company equity is transferred to the public, the management team must then perform their duties under a new dynamic, the atmosphere of intense scrutiny and watchful eyes of several thousand individual co owners (Shareholders) who have the future right to cast one vote for every share of common stock they own. This new voting process can diminish a founders control and or authority while empowering shareholders with leverage to regularly select the B.O.D. (Board of Directors) and all other executives based on their specific criteria. This new corporate structure now means future voting may indeed be influenced primarily by evaluating an individuals past job performance, and not necessarily taking into consideration a persons loyalty and or longstanding history with the company. Essentially, the management team is now responsible for producing a profitable venture and ultimately must report to, and satisfy not only themselves, but a virtual army of individuals and institutions who have a vested interest in the company's overall success. Moreover, once the conversion from private to public company is complete, several "Wall Street" entities will then have an obligation to analyze underlying fundamentals and report specific accounting facts and figures to the public via respective publications. A subject which will be covered extensively in future articles.

As you can clearly see upon initial study, raising substantial working capitol to potentially jump start and grow a start up or stagnating privately held company via IPO can be a viable option, but it does come with a unique set of inherent circumstances and risks which need to be thoroughly researched, considered, and addressed prior to shopping the idea to potential Underwriters.

>> TAKING A COMPANY PUBLIC

• There are a multitude of steps that must be completed prior to the actual selling of shares to the public and or financial institutions and the table below illustrates the basic procedure in chronological order. Generally speaking, every prospective IPO must go through the following:

^{_{- Always consult your "Financial Advisor" or "Planner" regarding the risk & potential reward prior to investing in the highly volitile IPO market -}}

>> WHO CAN BUY IPO's?

Anyone can purchase an equity interest in an IPO via "Shares" ("Pre Market Shares" are usually subject to availability). Shares can be purchased with the assistance of a full service or discount brokerage firm if they have access to the new issue. Traditionally, the IPO has been a much sought after and enticing investment or "Trading" vehicle for the savvy risk tolerant high net worth Wall Street participant due to short term price "POP" and long term sustained market value appreciation potential. Three important factors that can drive higher market price adjustments or lack there of, are the following:

• Underlying Fundamental Strength
• Product / Service Demand
• "Sizzle"

In the past, IPO's were typically set aside for "Wealthy" or "A-List" clientele, however, this marketing strategy has been evolving in sync with the popularity and increased usage of online discount brokerages. The Internet now, as it has for decades, provides individual investors with convenient fingertip access to perform their own research and make their own financial decisions before each transaction is executed. Recent studies and reports indicate the average investor spends more time perusing the Internet which as we all know is plugged into a vast spacious communications network that can provide easier access to pertinent information potentially resulting in the successful purchase of new issues or "IPO's". And of course, with new conveniences ultimately comes new responsibilities. Should a novice investor rely solely on his/her research to determine investment choices? Is this really the most prudent way for the inexperienced to buy and sell securities? Presumably the jury is still deliberating these questions and it's certainly an interesting subject to be followed up on in future articles.

As it stands today, if you have the financial resources and access to the shares, a buy transaction is just seconds away

>> "FLIPPING SHARES"

It can be a very profitable strategy for the IPO shareholder, but not so beneficial for short term stock price stabilization. Maintaining an even and orderly trading flow in an effort to prevent the proverbial "Bottom" from dropping out of this fledgling new issue, is a top priority for the underwriting firm. And even though "Flipping" is a legitimate, potential money making strategy, it's a somewhat derogatory term used to describe any owner of common stock who immediately or shortly after the IPO begins trading in the after market, sells or "Unloads" all or a portion of his/her shares for short term profit or loss. IPO participants are usually discouraged from implementing this kind of swift ownership exodus and may risk being scratched from future new issue "Marketing Lists". Regardless of stock price at the time of sale, either higher or lower than the original cost, results are still the same for a newborn company, potential instability, a situation which can lead to even more selling pressure in the short term depending on trading volume. A rapid price discounting effect snowballing in the wrong direction is one of the short term worst case scenarios for a fragile new born public entity.

_{^{- Thank you for visiting - My primary goal with this article is to help the novice gain a basic fundamental understanding of the speculative, volatile, & high risk nature of the "IPO" market - As always, consult a professional Financial Advisor or Planner before investing - I sincerely appreciate the continuous positive feedback from a growing online international audience of First Time Readers, Knowledge Seekers, Internet Surfers, Peers, New and Established Friends & Associates - Please feel free to explore & discover my vast & continuously expanding collection of online articles - A . P. -}}

^{_{About the Author -}}

^{_{<> Alternative Prime is a former "Personal Finance Professional" - Broker - Life Agent - Series 7 & 63 Registered Representative & NASD Member Licensed in 5 States - Stock & Options Researcher/Consultant/Trader/Investor - Contract Quality Check Supervisor - Regional Manager/Trainer and Formally Educated in a multitude of diverse subjects including Business Law Aspects <>}}

^{_{<> Images courtesy of Alternative Prime's "foto-prime" collection <>}}