What Is an IPO?

An IPO, or Initial Public Offering, is when a company sells its shares to the general public for the first time. Before this, the company is private, which means only a small group of people such as the founders, employees, or private investors own it.

Let’s use the already mentioned example of the local bakery. Until now, only the family that owns it has made decisions and enjoyed the profits. One day, the bakery decides to let anyone in town buy a piece of it. People can now own a small part of the bakery and even share in its future profits. This is essentially what happens when a company goes public through an IPO, but on a much larger scale.

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When a company goes public, its shares are listed on a stock exchange such as the New York Stock Exchange or NASDAQ. Anyone who wants to invest can buy a part of the company. The money raised from selling these shares can be used to expand the business, launch new products, or pay off debts.

In simple terms, an IPO is like opening the doors of a private company to the public. It gives people a chance to own a piece of the business and lets the company raise money to grow and reach new heights.

Why Do Companies Go Public?

When a company decides to go public, it is making a big decision that can change its future. Going public means selling shares of the company to the general public for the first time, and companies usually do this for several important reasons.

1. Raising capital to grow the business

One of the main reasons companies go public is to raise money. By selling shares to the public, a company can get a large sum of cash that it can use to grow. This money can help launch new products, open new offices, invest in research, or pay off debts. Think of it as getting a financial boost to take the business to the next level.

2. Increasing visibility and credibility

Being a public company often brings a lot of attention. When a company’s shares are traded on a stock exchange, it becomes more visible to customers, investors, and potential partners. This extra visibility can make people trust the company more, attract talented employees, and create new business opportunities.

Another important point is that public companies must follow strict rules about sharing information. They are required to report their financial results and important business updates on a regular basis, usually every quarter and every year. This means investors, partners, and the general public can clearly see how the company is performing.

For the average person, this is like the difference between a friend who tells you about their finances only once in a while, and a friend who openly shows you their budget every month. The second friend naturally earns more trust, because you always know where things stand.

The same goes for companies. Because public companies are so transparent, people tend to trust them more. This transparency builds credibility, reassures investors, and shows that the business is being run responsibly.

3. Providing a way for early investors to cash out

Before a company goes public, most of its shares are owned by founders, early investors, and employees. Going public allows these people to sell some of their shares and turn their investments into cash. It is a way to reward those who took the risk of supporting the company in its early days.

4. Offering incentives to employees

Many companies use stock options or shares as part of their employee compensation. When employees own a piece of the company, they are often more motivated to help it succeed. Going public makes it easier for companies to offer these incentives, which can help attract and keep talented workers.

In simple terms, going public is a way for a company to get money, gain recognition, reward early supporters, and motivate employees all at the same time. It is a big step, and while it comes with challenges, it can open exciting opportunities for growth and success.

Famous Examples of IPOs

Some IPOs make headlines not just because of the money raised, but because they show that a company has become a major player in the market. Let’s look at a few well-known examples to see how this works:

• Facebook (2012): Facebook raised $16 billion when it went public, making it one of the largest tech IPOs at the time. Suddenly, people could own a piece of the social media giant, which had already become part of everyday life. Early investors and employees could turn years of work into cash, while the public got a chance to invest in the company’s future.
• Alibaba (2014): Chinese e-commerce giant Alibaba raised $25 billion in its IPO, setting a record for the largest IPO in history at that point. This was not just about raising funds; it also marked Alibaba as a global powerhouse. Investors worldwide could now buy shares in a company that had transformed online shopping in China.
• Spotify (2018): As one of Europe’s most famous tech companies, Spotify chose a slightly different approach. It used a “direct listing” instead of a traditional IPO, allowing existing shareholders to sell shares to the public without raising new capital. Spotify’s move was a landmark for European tech and showed that a homegrown company could successfully compete with U.S. giants.
• Saudi Aramco (2019): The world’s largest oil company made history by raising $25.6 billion, making it the biggest IPO of all time. Saudi Aramco’s IPO highlighted the enormous scale of global energy markets and demonstrated how governments and investors can participate in companies that are central to the world economy.

These examples show that an IPO can transform a company overnight, turning it from a private business into a household name. It is not just about money; it is a milestone that gives the public a chance to be part of the company’s journey and watch it grow.

How Does the IPO Work 

The process usually starts with the company hiring investment banks to act as advisors and underwriters. They help the company prepare all the required documents, meet legal and financial standards, and present the business to potential investors. The company also publishes a detailed report called a prospectus, which explains its finances, strategy, and risks.

The share price is set with the help of large institutional investors through a process called "book building," which gauges demand and helps determine a fair starting price. At first, most shares are sold to big institutions like pension funds and mutual funds. Once trading begins, the shares become available to individual investors in the open market. From that point on, the company is public and must follow strict reporting rules, which keeps its business transparent and builds trust.

What It Means for Investors

Investing in an IPO can feel a bit like joining a rollercoaster ride. On one hand, it is exciting because you have a chance to be among the first people to own a part of a company that could grow into a household name. On the other hand, it comes with some risks that are important to understand.

When a company first goes public, its stock price can change rapidly. Sometimes it soars on the first day of trading, and other times it drops because the market is unsure about the company’s future. This is normal and it happens because investors are trying to figure out what the company is really worth.

It is also worth knowing that not every IPO becomes a success story. Some companies grow quickly and make early investors a lot of money, while others may struggle, and their stock price can fall. For example, companies like WeWork and Snap experienced significant declines shortly after their IPOs, showing that even well-known names are not guaranteed to succeed.

From the company’s standpoint, IPO is more than just a financial event. It marks a major milestone in a company’s journey. It moves a business from being private, usually owned by founders and a few investors, to a public company that anyone can own a part of. For companies, it provides funds to grow, attract new talent, and increase visibility. For the public, it offers the chance to become a shareholder and take part in that growth story.

In the end, even if you are not planning to invest, understanding IPOs gives you a clearer picture of how companies expand, attract investment, and impact the economy. It is a peek behind the curtain at the business world, showing how a simple idea or product can transform into a publicly traded company that millions of people can own a piece of.