When companies decide to raise capital, they often do so by going public and selling shares of stock. The initial sale of a company's stock is known in the stock market as an Initial Public Offering, or IPO. Many IPOs are the subject of intense investor attention and interest, but the process allows few, if any, opportunities for average individual investors to take part in the initial sale of shares.
Going Public
When a company decides to go public, it first hires an underwriter, usually a large investment bank. The underwriter agrees to buy all shares of the company's stock minus the investment's firm commission, usually about 5 to 7 percent.
SEC Filing
After the company secures an underwriter, it files a prospectus with the federal Securities and Exchange Commission.
Selling the IPO
The underwriter commits to buy all the company's shares but plans to sell most of them to its biggest institutional clients. Often, the underwriter will try to generate interest in the stock among its biggest clients.
Subscribe
Interested institutional clients "subscribe" to the offering. A subscription is a commitment, albeit non-binding, to buy shares of the stock. The underwriter tries to set a per-share price as high as possible, while still selling the bulk of the stock.
Opening Day
On the day of the IPO, the underwriter buys all the company's shares and then sells all subscribed shares to the institutional clients. Most investors cannot get in on the IPO unless they have large accounts at the institutional clients that subscribed.
Trading
Shares of the company's stock can be traded when the credit is made in the institutional investors' accounts.
