An IPO is an initial public offering of a companys stock. This is done either to raise capital for a new company or for an existing company to simply offer shares of stock for the first, known as going public. In either case, there is a certain set of steps in the IPO Process that must be followed.

The first thing a company must do before issuing stock is file a registration with the Securities and Exchange Commission (SEC.) Since the SEC has the power of nullifying any attempt to go public, a companys statement must be thoroughly accurate. Data concerning the financial health of the company must be entirely truthful. Due diligence should be the order of the day. Putting a company out onto the IPO Market is serious business. Every step in the IPO Process must be done carefully.

Once the registration is completed (and sometimes beforehand) companies will seek one (or more than one) investment banker. An investment banker will serve two purposes. The first of these services is to distribute the companys prospectus to potential future stock holders. A prospectus is a legal document that outlines an overall biography of the company. A few things that are standard to include are a breakdown of the companys market, biographical information of company executives, financial statements and projections on stock price. This document is often referred to as a red herring. The reason for this nickname is that on its cover is a stamped notice in red ink from the SEC that no stock may be purchased before registration has been approved.

The second thing that an investment banker, or underwriter, does is buy the companys stock and then resell it to the public. In a so-called road show, executives from the company and the underwriters promote the stock to possible investors. This is done by meeting and going over company strategy.

Since a company is selling stock to an underwriter instead of directly in the marketplace, such as the New York Stock Exchange, they are mitigating their risk in the market. Further, they are able to receive their monies upfront and do not have to incur costs of promotion. The downside for the company is that it forfeits the chance of higher stock prices that could have been created by the market.

The above does not happen until SEC approval has been granted. After approval and usually a day or so before the actual public offering, the company and the investment banker agree on a share price and the number of shares to be sold. The offering is complete when the company receives the money and delivers the shares to the underwriter.

Underwriters carefully look into a company before deciding to purchase securities. Before taking the risk, they want to feel confident that the value of the stock will be higher than what they paid for it. The potential exists for great profit but also for great loss.

While, the risk is high for the investment banker, the IPO process provides very exciting opportunities for investors. The idea of getting involved with the next giant high-tech company during its early stages can mean great profit down the road.

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