Financial Dictionary -> Investing -> IPO

IPO stands for Initial Public Offering and simply refers to the initial availability of stock to the general public that a company offers. Usually the company is just going public from a private company, or is a small business looking for the capital to expand its operations and does this through issuing stock. Rarely will a very large private company go public, but it does happen and they will do it through an initial public offering to get the ball rolling.

Usually an IPO is issued in conjunction with help from an investment bank or underwriters who will guide the company through the process of becoming publicly traded. They will decide which is the best route to take (i.e. whether to issue common stock or preferred stock), what to set the price at and various other aspects of the process.

From an investor's standpoint an initial public offering is quite a risky stock to invest in, because the company is unproven on the stock market and there is no real way to tell how the stock will trade over the first few weeks. There is obviously no historical data to look at, unless the company has been public before, which gives off a bad vibe in the first place. Most IPO companies will be going through a growth period also, so internally there is some panic over how the company will fair in the long run. This makes it harder to value. A general rule of thumb if you think an IPO company looks solid is to wait a few months before beginning to trade so you can see if the stock is taking off or not.

Generally what attracts investors to IPO stock is that they are initially underpriced to entice people in and create hype.