What is an IPO?

An IPO is the process where a company creates new shares which are then listed on the share markets to raise money

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What is an IPO?

An IPO, or initial public offering, is a process of a company moving from private ownership (owned by its founders, financial backers and employees) to a public company, popularly referred to as going public. When a company is public, its shares are listed on a share market for anyone (i.e the public) to buy and sell.

During an IPO, a company creates new shares to sell in order to raise money. These shares are typically sold to a select group of institutional investors - this access has historically been one of the advantages institutions have over everyday investors.

What are the risks of investing in an IPO?

As with any investing, buying shares in an IPO comes with risks (and benefits). During an IPO, you're buying a slice of a company before it's had a chance to hit the market. This means the share price hasn't been subject to market valuation and because share prices are driven by supply and demand, you won't know if there's low or high demand for shares in the company.

It can be difficult to predict the share price on its initial day of trading or near future because there's often little historical data to analyse the company. Also, most IPOs are for companies going through growth periods (which is why many are raising money through an IPO in the first place!), and there can be uncertainty about their future value. And there are plenty of IPO examples where companies traded below their IPO price.

While a company’s prospectus can make for intense nighttime reading (some coming in at around 200+ pages!), to fully understand all of the risks, you'll want to have a look, do your own research and have an IPO plan before committing a significant amount of your hard-earned money.

Learn more about IPOs

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