A company’s initial public offering, where a company offers its stock to the public for the first time, shows that the company is ready to compete with others. It can take years for a company to prepare for its IPO while eager investors await their chance at owning and trading the company’s stock. IPOs are important because they provide a company with funding, and they can have a large impact on stock prices.
When a company offers stock for the first time, it sets the price of individual shares. Although it might seem that a company would set the price high to maximize their earnings, investors typically do not respond well to high prices. Thus, companies tend to set their prices lower than they may prefer to avoid a steep price drop.
It’s the company’s hope that after the end of the first full day on the market, their stock prices will have risen by investors snapping up shares. In fact, if prices rise high enough, it can help those who have built a company or startup to become instant millionaires or even billionaires. However, that isn’t often the case. Why is that?
First, timing is important. An IPO is likely to be more successful if the timing is right. A strong economy is necessary, while an economic downturn may lead to a lackluster first day. Company owners should consider the strength of their specific industries, too, even if the overall economy is robust.
On top of that, an IPO means a company has suddenly become the target of public attention. Investors will pry into a company’s product or service, business plan, and cash flow. They’ll look at previous quarterly reports. If any of these elements is lacking, or if the company doesn’t appear to offer long-term growth potential, investors are unlikely to purchase shares, and the stock price won’t rise. It can even fall.
For this reason, companies may wait quite a while before going public to increase their liquidity and assets. This may mean holding off on expansions and projects.
Of course, a successful first day on the market doesn’t guarantee a company’s stock will do well over time, but it can certainly help.