Initial Public Offerings (IPOs)

An IPO is when a company issues and sells stock on public markets with the aid of an underwriter. This allows companies to access a much larger pool of capital to raise money, as everyone, not just accredited investors, can buy stock. However, the company must often pay significant underwriting fees and greatly increases reporting and transparency requirements.

Roadshows are presentations made by underwriters and company management to market an initial public offering (IPO) to prospective investors. In addition to generating attention for a stock’s IPO, roadshows can help underwriters gain information to determine the IPO price, a process known as book building.

A greenshoe option, also known as an overallotment option, is a contract provision in a company’s underwriting agreement that allows underwriters to sell more stock than the initial IPO amount. These provisions usually allow for up to 15% more shares to be sold than originally intended, and are generally invoked when there is significantly more-than-expected demand for the stock. The name “greenshoe” comes from the Green Shoe Manufacturing Company, the first firm to use this type of provision in an IPO.

Bookbuilding is the process by which underwriters determine the issue price of an initial public offering (IPO). Underwriters will request bids from institutional investors to see how much stock they want and at what price.

A red herring is an incomplete draft prospectus released by a company before an initial public offering (IPO). The red herring allows the company to let investors know it will be issuing stock, before it is sure how much stock it will issue and at what price. These prospectuses also tell investors information about the company’s operations finances. The nickname comes from the red disclaimer on these draft prospectuses indicating that it has not yet been finalized and is still subject to change.

An initial public offering (IPO) is said to be oversubscribed when the demand for its stock is greater than the number of shares it is selling. An oversubscribed offering will often invoke a greenshoe option, a provision in its underwriting contract that allows additional shares to be sold to meet demand. Other types of offerings such as debt securities can also be oversubscribed.

A direct listing, also known as a direct public offering (DPO), is an alternative way for a company to go public instead of an initial public offering (IPO). In a direct listing, a company issues no additional stock and does not hire an underwriter, it simply lists currently existing shares for sale on public markets.

A stabilizing bid is when an underwriter purchases stock following an initial public offering (IPO) in order to prop up the price of the stock. This happens when the underwriter overestimated the amount of demand for the stock.