MARCH 2000
The ABCs of IPOs
by Jeff Jacobson
If you're among the masses thoroughly confused about Initial Public Offerings (IPOs), the following vocabulary of fundamental terms will impress your friends at your next schmooze-fest.
Why do companies "go public"? To raise money, increase the company's financial base, liquidity, prestige and ability to attract management and make acquisitions. Established companies often go public by spinning off subsidiaries to "unlock hidden value."
IPO: a company's first offering of stock to the public. Typically, the corporate issuer sells the shares to an investment bank (the underwriter), who then sells them to investors at the "offering price."
Follow-on offering: occurs when a company that's already public - meaning it has already done an IPO - sells more shares to the public.
Secondary offering: selling shares belonging to existing shareholders.
Hot issue: a new stock that is in great demand. The price of these stocks usually soars in price on initial stock market trading because the demand is usually greater than the available shares.
Prospectus: describes the company that is going public, its earnings record, balance sheet, operating plan, the business risks it faces, and how it will use the proceeds of its stock offering.
"Flipping" IPOs: buying an IPO and reselling it for a quick profit; the hottest IPOs can make their purchasers a quick profit by soaring soon after trading begins.
Stock tombstone: an advertisement that a company places in a financial publication to announce that it is offering new stock or bonds to the public. A tombstone can also be used to announce that the offering has been completed or that a merger has been concluded. Tombstones are named for their traditional black borders and heavy print.
Red herring: a preliminary prospectus issued by stock-underwriting firms to gauge investors' interest in a prospective stock offering. The document must contain a warning, printed in red, that the document does not contain all the information normally required by the Securities and Exchange Commission, and that some parts may be changed before the final prospectus is issued to the public.
Can I get a piece of the IPO action? Without tens of millions of dollars to invest, you may be sitting low on the financial totem pole. After researching the company and compiling a prospectus, the investment bankers underwriting an IPO take their clients on a "road show" to attract a target audience of buyers, typically analysts and large institutional investors, not individual investors.
For more info online, check out these IPO-related sites: ipocentral.com; ipomaven.com; ipomonitor.com; openipo.com; directipo.com.
 
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