An initial public offering (IPO) of stocks is the first offering of stocks for sale by a company. An IPO subscription is an offer to a buyer to purchase soon-to-be-issued stocks.
An IPO is beneficial to the seller in several ways. When the company engages in an IPO, investment capital becomes available. This capital can be used for new revenue-generating projects, which allows for more rapid expansion than would be possible with the limited revenue available to the company.
While an IPO allows for immediate acquisition of capital, this may not always be the best method for growth. An IPO does not necessarily provide an improvement in the stance of the company. As a result, alternative strategies such as a merger may be a better long-term approach.
The Underwriting Process
In most cases, an IPO is handled by an underwriting syndicate that buys shares of the company and offers them for sale to investors. The company and the syndicate work together to formulate the structure and terms of the offering. Often the syndicate targets wealthy or institutional investors since they are more capable of buying large blocks of stock. Individual investors may be limited in the number of shares they can buy. "Hot" IPOs are usually offered only to preferred clients.