Share prices in an IPO can fluctuate.
Small business owners often finance their ventures with personal savings, money from friends or relatives and small business loans. As a business grows, managers may turn to other sources of financing to fund business expansion such as venture capitalists or the general public. The term "IPO" is an acronym for "initial public offering," which is when a company first sells shares of stock to the public.
Basics
A share of stock is a small portion of ownership in the company that issued the stock. Companies that want to raise large amounts of money to fund business expansions can often achieve their goals by selling shares of stock to the public through an initial public offering. After a company goes through an IPO, shareholders can freely buy and sell shares of the company's stock to one another through a stock exchange. Undergoing an IPO is sometimes called "going public."
Benefits
One of the primary benefits of an IPO is that it can enable a business to raise a large amount of money in a short period of time that it does not have to repay. Borrowing money from a bank or other lender can be costly because you'll owe interest on the borrowed funds. Going public can also give a company the option of providing compensation to employees in the form of stock and may give the company greater public visibility and prestige.
Drawbacks
Going public can have several potential drawbacks. Public companies are subject to more scrutiny than privately held companies and must make certain information, such as strategies, financial information and executive salaries, available to the U.S. Securities and Exchange Commission. In addition, company management may be controlled by the desires of the shareholders and the board of directors.
Considerations
From an investor's perspective, investing in a company when it goes public can be risky. It may be difficult to judge whether a new public company's stock will go up or down after its IPO, so early investors may gain or lose a large amount of money quickly. The Securities and Exchange Commission says that in some cases, demand for stock during an IPO can be very high, which can make it difficult for individuals to buy shares.
