What is an IPO?
An initial public offering, or IPO, is the first sale of a corporation’s common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock exchange comes with heavy regulatory compliance and reporting requirements.
The term IPO only refers to the first public issuance of a company’s shares. It assumes a company is big enough, successful enough, and has the required track record to raise capital in the public equity market. If a company later sells newly issued shares again to the market, it is called a seasoned equity offering. When a shareholder sells shares, it is called a secondary offering and the shareholder, not the company that originally issued the shares, retains the proceeds of the offering. These terms are often confused and only a company which issues shares can make a primary offering or IPO. Secondary offerings occur on the secondary market, where shareholders (not the issuing company) buy and sell shares from and to each other.
Shares in Groupon Inc., a pioneer of the online coupon business, jumped by more than a third in their first day of trading on the Nasdaq stock exchange.
A little before markets closed, the shares were trading at $27.19, well above the $20 their initial public offering was priced at Thursday evening. That’s a gain of about one-third. The stock had earlier been as high as $29.52, a gain of almost 50 per cent on the day.
Early estimates of the stock’s IPO pricing had been as high as $25 a share, before being scaled back to as low as $16 to $18 in recent weeks as stock markets cooled. The IPO only sold 5.5 per cent of Groupon’s shares, which means the market is currently valuing the company as a whole at more than $17 billion US.
The Chicago-based company is the market leader in the fast-growing group-buying business. The company partners with local companies to offer drastic discounts via the form of coupons, emailed to their millions of email subscribers.
Though it’s spawned many copycats after its 2008 launch, Groupon has the advantage of being first. This has meant brand recognition and investor demand, as evidenced by its sizzling public debut.
Although the company has tens of millions of subscribers, filings with securities regulators reveal that it is not yet profitable.
Discussion Questions:
1. Do your own research on IPO’s, why is there such a demand?
2. Due to the tens of millions of customers , do you think Groupon will continue to grow ?
3. Why are shareholders willing to purchase and own shares in a company that has not made any profits?
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