For this installment of Investing 101, we'll take you through the process of how and why companies go public and offer stock to investors in an initial public offering, or IPO.
There are currently about 15,000 public companies in the U.S. and in each and every instance, the IPO-journey begins once a business announces that it wants to raise money by selling some, or all of itself, to outside investors.
A timely example is Twitter (TWTR), where the founders and early backers are selling about 10% of the business they've built on the New York Stock Exchange.
No matter what stage of life - or profitability - an IPO'ing company is in, they all must publish a prospectus which details its basic business and financial information, as well as the expected price range that the shares will be sold at, the ticker symbol and exchange where the newly minted stock will trade.
Pricing an IPO is really more art than science. A company like Twitter obviously wants to get the highest price possible price for its stock, thereby returning as much money as possible to its investors. As the middleman between the company and new shareholders, it is the job of an investment bank to gauge demand and sentiment and then determine what the marketplace is willing to pay.
Once all the shares have been spoken for and the deal gets priced, it is time for the stock to actually begin trading in the open market. Like all goods and service, the share price will fluctuate depending on the prevailing state of supply and demand, or in the case of IPOs, the number buyers and sellers.Read More »from A Peek Behind the Curtain of IPOs Like Twitter’s