Why make an initial public offering (IPO)?

Companies make initial public offerings to raise finance. Some companies may have reached the stage at which they have taken on so much debt that they would struggle to persuade investors to lend additional capital at commercially viable rates. Selling shares can provide a more financially appealing alternative.

The proceeds of an IPO are typically used to fund expansion (e.g. opening new outlets, developing new product lines, moving into new regions etc.) and/or pay existing investors (including both equity and debt finance providers).

Defined Terms

Share Issuance / Initial Public Offering (IPO)

This is where a company lists on a stock exchange and sells shares to investors through the equity capital markets (an IPO refers to the first time a company does this). Investors provide money in exchange for shares representing an ownership stake in the company. They purchase shares with the aim of reaping returns in the form of capital returns (if shares are later sold at a profit) and dividends (if the company elects to pay dividends). Share prices are linked to a company's market value and thus may fluctuate in line with company performance. Shares are typically listed on a stock exchange to facilitate trading of the shares after the offering.

Prospectus

Legally required document that must precede bond or share issues. It advertises the issue to potential investors and contains information about the issuer's business, the potential risks and the issuing firm's financial circumstances in addition to the terms and conditions of the issue.