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The Capital Market and Its Players — Primary Market: Initial Public Offering
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Primary Market: Initial Public Offering

Initial Public Offering

An initial public offering, IPO for short, is a type of public offering in primary markets which occurs when a private company decides to sell (float) stocks to the public for the first time. It is through an IPO that a private company “goes public”.

float is the number of shares available for trading. It’s calculated by subtracting the number of closely held shares — those owned by insiders, employees or other major long-term shareholders — from the total number of shares outstanding.

IPOs generally involve one or more underwriters who work to facilitate the process, set an initial price for the security and then supervise its direct sale to investors.

How IPOs Work

In the primary market, securities are issued by organizations that seek to obtain extra capital so that they can expand or modernize the existing business. This means selling off parts of their own corporation with the total percentage varying per IPO.

For example, when Facebook ($FB) launched its IPO in May 2012, it wanted to raise US$5 billion while ensuring that early investors would retain control of the company. The stock debuted with a a 15% float of 421 million shares priced at $38 per share, a historic valuation of $104 billion. Ultimately, the IPO raised close to $16 billion.