Page 21 - Initial Public Offering - An Introduction to IPO on Wall Street

1. Definition
Merriam-Webster Dictionary defines IPO as “the first sale of a company's
1
stock to the public .”
Not a very insightful definition, right?

A more insightful yet simplified definition of an Initial Public Offering (IPO) is
“the process of offering shares of a privately owned corporation to the public
2
in a new stock issuance .”
The purpose of an IPO is to raise capital from public investors. The steps involved
in the IPO process are discussed later in this book. But, before we dive into the
IPO process, it is important to gain clarity regarding its definition and what it
entails.

This can be tricky because each of the different online resources on IPO have a
slightly different take on it. For example, the definition of IPO given above is a
generalized definition of an Initial Public Offering provided by Investopedia.

The economic times provides the same definition of an IPO using different
vocabulary. However, it also adds to it by mentioning that a private company
wanting to go public through an IPO could be “a new, young, company or an old
3
company which decides to be listed on an exchange and hence goes public .”
The Free Dictionary, an online dictionary and encyclopedia that consolidates
information from various sources to define different terms, provides a more
detailed insight into an IPO with the following definition:

“The first price for which a company offers to sell stock in itself when it
moves from private ownership to public trade. More generally, it refers to
the actual first sale of stock to the public. Small companies looking for a new
source of financing offer most IPOs, but large companies who wish to be
4
publicly traded can offer them as well.”
IG, an online trading provider, clarifies what happens after a company issues the
“actual first sales of stock” through an IPO:

“After an IPO, share ownership is opened out to the wider market, which is
why IPOs are also known as floating, flotation, or ‘going public’. It is further
understood that, “When a company embarks on an IPO, it lists a certain
number of shares on a stock exchange in order to raise investment capital.
IPOs are one of many ways in which companies can seek to raise capital, with
other popular options including finding major investors, crowdfunding or
5
using retained earnings. ”

1 Merriam Webster. Initial public offering. Retrieved from
https://www.merriam-
webster.com/dictionary/initial%20public%20offering
2 Investopedia. Adam Hayes. April 28, 2020. Initial Public Offering (IPO).
Retrieved from https://www.investopedia.com/terms/i/ipo.asp
3 Economic Times. Definition of ‘Ipo’. Retrieved from
4
https://economictimes.indiatimes.com/definition/ipo The Free Dictionary by Farlex. IPO.

Page 21