Page 30 - Initial Public Offering - An Introduction to IPO on Wall Street

In the modern investment portfolio, private assets and infrastructure play a much larger role.
However, they are fixed investments and difficult to get out of. Publicly traded equities offer a
level of liquidity that set them apart from most other asset classes.

The size of the US stock market, valued at over $70 trillion is also a huge factor. A balanced
portfolio in the US stock market is less risky compared to private asset investments.

2.6 The Role of Investment Banks

In the beginning, the business aspiring to go public recruits an investment bank—or a few of
them—to help the company in IPO underwriting. The underwriter (the investment bank (s)
performing the activity) will offer a certain amount for funding the IPO. The underwriter will
also enter into an agreement that see it buy the company’s shares being offered before they are
made publicly available.

Why do banks offer to underwrite the IPO? They do it to make profits of course. Banks only
offer to pay less per share than the price they think they can get for it in the market. To complete
the IPO process, the business founders must also register a statement with the SEC. That
statement contains key information about the issuing company, including financial and
ownership details.

Once the SEC approves the IPO, a date is set and announced for the IPO itself. The underwriter
will produce a brochure, a document detailing the finances of the issuing company. The
underwriter would also collaborate with the issuing firm to determine a stock price to offer
initially when shares are put up for sale to the public/new investors.

The underwriting bank then promotes the IPO with potential customers including individuals
and institutional investors for applications. The publicly available stock can be bought by retail
and institutional investors. However, it is not unusual for a forecasted IPO to result in rapid
increase in the price of the stock. The pressure of selling will cause the prices to decline and a
lot of uncertainty is normal as the underwriters "flip" their stocks into the market. The role of
investments banks or “underwriters” in the IPO process is discussed in much more detail later
on.

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