IPO resurgence: Getting in on the deal 

The U.S. IPO market is on the rise in the first half of 2024, with the number of deals up 30% compared to the same period last year, and proceeds hitting $18.6 billion.¹ After a slowdown in recent years, there's been an IPO resurgence, making it more important than ever to understand what IPOs are and how they work. By grasping the basics of the IPO process, along with the pros and cons of investing in IPOs, you will be better equipped to make informed decisions that could impact your financial future.

What is an IPO? 

When a private company offers its shares to the public for the first time, it's known as an Initial Public Offering, or IPO. The process transforms a private company into a public one, allowing it to raise capital from public investors. Think of it as the company's debut on the stock market stage.

When Google (now Alphabet Inc.) went public in 2014, its common stock shares were offered at $85 per share for a company valuation of $23 billion.²

During an IPO, a company sells a portion of its ownership in the form of shares. These shares become ready for trading on stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ.

When you know what an IPO is, you can better evaluate opportunities and risks. IPOs can be potentially lucrative, offering the chance to invest in a company's growth potential from the ground up. However, they also come with volatility and uncertainty. Right after the IPO, a company's stock price can be quite volatile.

IPO benefits for customers and investors

When companies go public, they give up complete ownership and must now answer to shareholders and the public. Companies are required to regularly keep the public updated about their activities and financial performance, as well as comply with stringent regulatory requirements.  These obligations are costly and can create public scrutiny – and unfavorable facts about an IPO’s detailed financials may affect the company’s value.

For investors, IPOs can provide general public access to high-growth investment opportunities at ideal prices. However, they can be risky, as IPOs are often volatile and unpredictable. Investors should properly conduct due diligence for any investment. 

The process: How companies go public

The IPO process begins with pre-IPO preparation. A company must get its financials in order and prepare a compelling business story.

Next, the company hires investment banks, known as underwriters, to manage the IPO. These underwriters help determine the IPO price, buy the shares from the company, and sell them to the public.

The company then files a registration statement with the Securities and Exchange Commission (SEC). This document, known as the S-1 filing, contains detailed information about the company's business, financials, and risks. The SEC reviews the S-1 filing to ensure all required disclosures are made.

Once the SEC approves the registration, the company and its underwriters go on a "roadshow", a series of presentations to potential investors to generate interest in the IPO. After the roadshow, the underwriters and the company decide on the final IPO price and the number of shares to be sold.

On the day of the IPO, the company's shares are listed on a stock exchange and become available for public trading. This marks the official transition from a private to a public company.

Regulatory Requirements

Companies must adhere to strict SEC regulations to protect investors and maintain market integrity. These regulations require comprehensive disclosures about the company.⁴

IPO resurgence: Why are we seeing more IPOs?

Lately, there has been a noticeable resurgence in the number of companies going public. What could be driving this trend? Several factors come into play.¹

Positive gains in the stock market as a whole over the past few quarters have given investors a boost in confidence. For example, the S&P 500® Index is nearing all-time highs in the U.S.⁵ A robust and positive stock market could motivate a private company to make the decision to launch its IPO. Although market activity has no bearing on a company’s IPO price per share, one could argue that it could be a good time to make such a leap when the overall investing mood is a positive one. If a private company can have a successful IPO, that could lead to raising the capital it hopes to seek through the sale of its shares. These proceeds can used to expand the business, fund research and development or pay off debt. Moreover, the success of high-profile IPOs creates positive momentum, encouraging other companies to follow suit.

What investors need to know

Investing in IPOs can be exciting but also risky. On the one hand, IPOs offer the potential for significant long-term returns.

Early investors in successful companies often see substantial gains as the stock price rises. Additionally, IPOs can allow you to invest in a company's growth from the ground up, which can be particularly rewarding in the long run.

However, the risks should not be overlooked. Investing in stocks come with risk, but IPO stocks in particular can be highly volatile, especially in the first few months of trading. Prices can swing dramatically based on:

• Market sentiment
• Company performance
• Broader economic factors

Investors also face the challenge of limited historical data, making it difficult to evaluate a company's true potential accurately.

To evaluate potential IPO investments, start by researching the company thoroughly. Look into its financial health, business model, competitive landscape, and growth prospects.

Reviewing the company's S-1 filing with the SEC is also crucial, as it provides detailed information about its operations, risks, and financials. Consulting with financial advisors or using investment research tools can further help in making informed decisions.

It is important to remember that investing involves risk, including possible loss of principal. Also, one should realize that an investment in one company carries a higher level of risk than a diversified portfolio.

Successful IPOs can lead to long-term gains as the company grows and its stock price appreciates.