(I put this in IMHO vs GQ because I suspect opinions will be offered as well as factual questions)
I periodically get notifications of upcoming IPOs from Fidelity (we have retirement money there). I’ve got a fair bit of cash in one such fund and every now and then toy with the idea of buying a few shares in an IPO.
What are the mechanics? The notices come with information about expected pricing, offer dates, etc.
Do you say “I’ll buy it for xx dollars” and hope they’ll sell for that?
Why would an existing company (that I’m pretty sure is publicly traded) offer additional shares via IPO?
What other questions do I not even know enough to ask?
No. You say, “I’ll buy 100 shares” and you get charged what the IPO is priced. The range of expected pricing is set by the investment banking firm, but will not be more than the top of the range if you buy the IPO itself.
Note that if you’re in on the ground floor, you get the lowest price of anyone. A hot IPO might be priced at, say, $25. If you commit, that’s what you pay. The price will immediately rise if the stock is hot and you can turn it around that way (which is how investment professionals do it).
An existing company sells more shares in an IPO in order to raise money. All the money paid for the IPO when prices (minus brokerage fees) goes to the company. Thus 1 million shares at $10 a share means $10 million (minus fees) to the company. There are other considerations (putting out more shares dilutes the value of existing shares), but the point is to raise the cash.
Please correct me if I’m wrong-isn’t that known as an equity offering? I’m not pointing this out to be a dick, I’m actually switching to financial services and am trying to get ahead on the vocabulary.
Yes, that’s what I thought. It’s called an IPO when you’re taking the company public and then when they want to issue more shares to raise capital, it’s an equity offering.
I’m mortified to think that I may be using them incorrectly during networking events! Bankers usually cut me a little slack because I’m a career switcher but I suspect that isn’t going to last long.
Equity offerings are offerings after the company has already gone public. There are equity and debt offerings, I think one is backed by common stock, and the other is backed by bonds.
I was offered an entry to an IPO of a stock from a startup we were customers for. Besides the ethical issues of accepting it, I was very dubious about their price. I was right - it spend most of its time well below that price. Just want to stress that IPOs have risk like every other investment, and do not automatically go up in price.
Companies offer additional shares (or IPO shares for that matter), in order to raise capital. Say I have a business worth 10 million dollars. I want to grow that business but I need another 5 million dollars to do it. One way is to take the company public by selling 50% of the ownership (equity) of the company in the form of stocks. So now I have 50% ownership of the company, $5 million in cash and the other 50% of the company is spread among the investors who bought the IPO shares (who are expecting me to make the company worth more).
At some point in the future, I may decide I need even more money so I might sell even more shares of stock.
I may also find it adventageous to reacquire stock in the form of a buyback.
Alternately, I could raise money by issuing $5 million in debt in the form of bonds. Bonds are essentially a promise to pay back the money you invested, plus interest over a period of time. They tend not to increase in value as much as stocks but they are also less risky and thus less likely to decrease in value as well.