Initial Public Offer

An initial public offering (IPO), sometimes called a public offering, refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.

Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public. But while they’re undeniably trendy, you need to understand that IPOs are very risky investments, delivering inconsistent returns over the longer term.

As with any type of investing, putting your money into an IPO carries risks—and there are arguably more risks with IPOs than buying the shares of established public companies. That’s because there’s less data available for private companies, so investors are making decisions with more unknown variables.

Despite all the stories you’ve read about people making bundles of money on IPOs, there are many more that go the other way. In fact, more than 60% of IPOs between 1975 and 2011 saw negative absolute returns after five years.

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