What does IPO

IPO: what is an IPO? | Definition & information for investors

With an IPO, a company can obtain fresh equity on the financial market. But investors can also benefit from it. How an IPO works - and what that means for investors.

Everything happens for the first time at some point. This also applies to companies that decide to sell company shares. If you are publicly offering shares for sale for the first time, one speaks of an IPO or - in English - of an IPO.

But what is that anyway? How does an IPO work? And how can I benefit from it as an investor? t-online will explain it to you.

What is an IPO?

AIPO is the first issue of shares of a company to the general public. From this point in time, investors can buy shares in a stock corporation on the stock exchange for the first time and thus become co-owners of the company.

This process is called in English IPO, which is short for "Initial Public Offering", in German: "First time public offering" of the shares. This term is often used in Germany when a company goes public.

Why does a company go public?

The main reason for an IPO is to be a companycan raise new equity with an IPO. To do this, it sells part of the company to investors using a share, which is why they are also called company shares. An IPO can be useful if a company wants to expand, for example, or wants to raise money to pay off its debts.

These are particularly attractive for companiesinstitutional investors, for example banks, mutual funds or insurance companies that buy the company's shares. The reason: They usually buy a lot of shares and keep the company so liquid. But private investors can also benefit from share trading and an IPO (see below).

In addition to the opportunity to get fresh capital, an IPO can also come withMarketing issues have to do. With an IPO, many companies hope for additional awareness and a better image and greater awareness of their own brand. An IPO can be such an important step, especially for start-ups, i.e. small, young companies.

How does an IPO work?

In practice, an IPO is a series of several steps. An overview:

  • Issuing bank: First of all, the company that wants to go public has to decide which investment bank should accompany the IPO.
  • Company analysis: Now analysts take a close look at the company and, with the help of the investment bank, draw up an issue prospectus, also known as a stock market prospectus.
  • Roadshow: Potential large investors, such as fund companies or insurance companies, then receive the prospectus. The company is now trying to advertise the IPO in advance with the investment bank.
  • Issue price and share allocation: Based on the feedback from investors, the issuing bank then sets a price range for the initial sale of the share. Large investors and their investors can now "subscribe" to the shares. What is meant by this is that they can acquire the shares before the IPO - in a certain time, the subscription range. After this period, the final issue price will be determined.
  • Initial listing: Now the share is in the running for the favor of smaller investors and investors on the stock exchange. The famous share bell rings. The general public can now trade the stock. Depending on the demand on the stock exchange, it is now decided whether the issue price was set too high or too low.

What are the alternatives to an IPO?

It doesn't always have to be the IPO. There are several alternatives to the IPO. An overview:

  • Direct placement: In the case of direct placement, also known as direct listing or "direct listing", the papers are brought directly to the stock exchange without the support of investment banks and a prior pricing procedure. Companies such as the music service Spotify or the messenger app Slack have gone public with this rather unusual, but cheaper option.
  • Reverse takeover:A reverse takeover, also known as a reverse IPO, is ultimately an IPO through the back door. Here an investment bank or an investor initially only brings a shell to the stock market, which a company can later slip into. A key advantage of this approach: With this IPO, fewer rules have to be adhered to. A similar approach is the IPO of a so-called SPACwhich is especially popular in the USA. Read more about this here.
  • Dutch auction: With this procedure, the issue price of the shares is based on an auction. In this way, private investors in particular have a chance to get hold of the shares; in this case, major investors do not have the right of first refusal.

What does an IPO mean for investors?

With a After going public, it is possible for investors for the first time to buy a share in the company, so you can participate directly in the company. It is also possible that fund companies, banks or insurance companies will switch their funds and invest in the new share.

Can investors buy stocks before going public?

Yes, that is possible. You can "Subscribe" shares before the official start of trading. To do this, you would have to contact a bank, major investor or stock trader who is offering the stock before the IPO. With this you have to indicate how many shares you want to buy and at what price.

However, it can happen that the share "oversubscribed" is. That means: there are more interested parties than shares, the new shares are then distributed - according to a special system.

Whether it's worth buying a stock before going publiccannot be said in general terms. If the price rises immediately after the IPO because the share is in demand, you may have made a bargain. However, it can also be the case that the stock falls after the start of trading. In that case, you may lose money.

In general, it makes more sense anyway if you spread your money widely over many stocks and not on one stock. Read here the easiest way to do this.