Initial Public Offerings (IPO) Key Terms

Use Initial Public Offering key terms to improve the capital position of your company

By Kelley Keith

The most common reason for an Initial Public Offering is to increase the capital available to a company for expansion. A single IPO can raise billions of dollars and fund most companies into the near future. However, they do mean losing control of a company to shareholders and can create more layers of management. To understand the process, it helps to know Initial Public Offerings key terms such as underwriters, common shares and the public offering price.

Underwriters

Underwriters are the investment banking professionals who agree to sell a certain number of securities at a given price in return for a fee. If the underwriter fails to sell all of the shares, the underwriting syndicate agrees to take responsibility for the losses. An underwriting syndicate is simply a group of underwriters that work with the primary underwriter to promote the IPO. The syndicate is also necessary because most IPOs are simply too large for one underwriter to handle.
Try: Use the information at Investopedia for a basic definition of an underwriter. For a detailed review of the process, examine the article from the American City Business Journals.

Firm commitment or best efforts basis

The two types of IPO processes are the firm commitment and best efforts basis. The firm commitment is the most common and holds the underwriters solely responsible for any unsold IPO shares. On the other hand, in a best efforts basis IPO, the underwriter isn't responsible for the unsold shares.
Try: Review the definitions and explanations of best efforts basis available at Business Finance.

Prospectus

A prospectus is the document that provides all of the details of the IPO. Written by business lawyers, the prospectus is not an easy read but it is the main marketing tool for an IPO. It tells investors all the relevant information regarding the reason for the IPO. The prospectus must contain no false or misleading information to avoid future lawsuits.
Try: Study the prospectus tutorial from Hoovers to gain more insight into the document.

Free riding

Free riding is an illegal practice in which the underwriter holds part of the IPO back for sale at future date and higher price. Free riding was somewhat common during the tech bubble in the late 1990s.
Try: Review the definition of free riding from the Financial Dictionary.

Common or preferred shares

When issuing an IPO, one must determine whether to issue strictly common or preferred shares of stock or a combination of the two. Most IPOs have a combination. Preferred shares differ from common stock in that they usually have specific shareholder rights attached to them.
Try: Compare common and preferred shares in the article at the Investor Guide.

Initial public offering price

The initial public offering price is the cost of each share to the general public established by the underwriter.
Try: Examine the data available at Finance Maps of the World for more on the public offering price.